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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _____________
COMMISSION FILE NUMBER: 1-11156
DYNEGY INC.
(Exact name of registrant as specified in its charter)
Illinois 74-2928353
(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
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Class A Common Stock, no par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Name of each exchange on which registered:
Series A Convertible Preferred Stock ---
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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 Class A Common Stock held by non-affiliates of the
registrant was approximately $4,222,087,213 on February 28, 2000, (based on
$44.8125 per share, the last sale price of the Common Stock as reported on the
New York Stock Exchange Composite Tape on such date). 99,066,639 shares of the
registrant's Class A Common Stock and 40,521,250 shares of the registrant's
Class B Common Stock were outstanding as of February 28, 2000.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of Parts I, II and IV in the
Annual Report to Shareholders for the fiscal year ended December 31, 1999. As to
Part III (items 10, 11, 12 and 13), Notice and Proxy Statement for the 2000
Annual Meeting of Stockholders to be filed not later than 120 days after
December 31, 1999.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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DYNEGY INC.
FORM 10-K
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.............................................................................. 1
Item 1A. Executive Officers.................................................................... 18
Item 2. Properties............................................................................ 20
Item 3. Legal Proceedings..................................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders................................... 27
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............. 27
Item 6. Selected Financial Data............................................................... 29
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 30
Item 8. Financial Statements and Supplementary Data........................................... 48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................ 48
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 48
Item 11. Executive Compensation................................................................ 49
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 49
Item 13. Certain Relationships and Related Transactions........................................ 49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 49
Signatures...................................................................................... 56
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For definitions of certain terms used herein,
see "Item 1. BUSINESS -- DEFINITIONS."
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PART I
ITEM 1. BUSINESS
THE COMPANY
Dynegy Inc. ("Dynegy" or the "Company") is a leading provider of energy
products and services in North America, the United Kingdom and in continental
Europe. Products marketed by the Company's wholesale marketing operations
include natural gas, electricity, coal, emissions, natural gas liquids, crude
oil, liquid petroleum gas and related services. The Company's wholesale
marketing operations are supported by ownership or control of an extensive asset
base and transportation network that includes unregulated power generation, gas
and liquids storage capacity, gas, power and liquids transportation capacity and
gas gathering, processing and fractionation assets. Dynegy's asset base is
further broadened by the acquisition of Illinova Corporation ("Illinova"),
providing significant fossil-fuel merchant generation capacity and a regional
electric and natural gas utility engaged in the transmission, distribution and
sale of electricity and natural gas. The critical mass achieved through the
combination of a large scale energy marketing operation with strategically
located assets which augment the marketing efforts affords the Company the
ability to offer innovative, value-creating energy solutions to its customers.
The Company is a holding company that conducts substantially
all of its business through its subsidiaries. From inception of operations in
1984 until 1990, Natural Gas Clearinghouse ("Clearinghouse") limited its
activities primarily to natural gas marketing. Starting in 1990, Clearinghouse
began expanding its core business operations through acquisitions and strategic
alliances resulting in the formation of a midstream energy asset business and
establishing energy marketing operations in both Canada and the United Kingdom.
The Company initiated electric power marketing operations in February 1994 in
order to exploit opportunities created by the deregulation of the domestic
electric power industry. Effective March 1, 1995, Clearinghouse and Trident NGL
Holding, Inc. ("Holding"), a fully integrated natural gas liquids company,
merged ("Trident Combination") and the combined entity was renamed NGC
Corporation ("NGC"). On August 31, 1996, NGC completed a strategic combination
with Chevron U.S.A. Inc. and certain Chevron affiliates (collectively "Chevron")
whereby substantially all of Chevron's midstream assets merged with NGC
("Chevron Combination"). Effective July 1, 1997, NGC acquired Destec Energy,
Inc. ("Destec Acquisition"), a leading independent power producer. During 1998,
the Company changed its name to Dynegy Inc. in order to reflect its evolution
from a natural gas marketing company to an energy services company capable of
meeting the growing demands and diverse challenges of the dynamic energy market
of the 21st Century. On June 14, 1999, Dynegy and Illinova announced the
execution of definitive agreements for the merger of Illinova and Dynegy. The
merger transaction was closed on February 1, 2000.
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; Decatur, Illinois; Englewood, Colorado;
London, England; Midland, Texas; Montreal, Quebec; Oakville, Ontario; Oklahoma
City, Oklahoma; Pleasanton, California; Tampa, Florida; Tulsa, Oklahoma; and
Washington D.C.
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.
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BUSINESS
THE ACQUISITION OF ILLINOVA CORPORATION
Dynegy completed its acquisition of Illinova Corporation early in the
first quarter 2000. Illinova, headquartered in Decatur, Illinois, was an energy
services holding company with 1999 annual revenues of $2.4 billion. Illinova's
four principal operating subsidiaries were:
o Illinois Power Company, an electric and natural gas utility engaged in the
transmission, distribution and sale of electricity and natural gas, serving
approximately 650,000 customers over a 15,000 square-mile area of Illinois;
o Illinova Power Marketing, Inc., a subsidiary engaged in the ownership and
operation of unregulated fossil-fueled electric generation in Illinois;
o Illinova Generating, Inc., a subsidiary that invests in, develops and
operates independent power projects worldwide; and
o Illinova Energy Partners, Inc., a subsidiary that markets energy and
energy-related services in the United States and Canada.
Dynegy believes the acquisition of Illinova provides significant
financial, operational and corporate governance advantages that enhance its
position as a leading provider of energy services and products. The combination
brings together a strong, innovative utility company owning strategically
located generation assets and operations, including electric transmission and
retail distribution capabilities, with one of the leading North American energy
marketers and independent power producers. These two companies have diverse but
complementary operations, providing qualitative and quantitative expansion of
Dynegy's electric generation capacity, while enhancing Dynegy's access to
dependable cash flow and an improved platform for further expansion.
Factors considered in evaluating the benefits of the merger included:
o The merger is expected to be accretive to the earnings per share of the
Dynegy shareholders.
o The addition of Illinova's traditional utility business is expected to
provide a stable base of cash flow from which the combined company will be
able to leverage its business strategy;
o The merger provides Dynegy with a larger platform in the electricity trading
market from which it can expand its marketing operations. This larger
platform is expected to provide the foundation for Dynegy's strategy to be
at the forefront of the restructuring of the power industry and the
convergence of the gas and electricity industries;
o The merger adds an additional 4,989 gross megawatts of electricity
generating capacity to Dynegy's current capacity of 7,238 gross megawatts
per year (both figures include current capacity as well as capacity under
construction). This additional capacity is in the Midwestern United States
and is expected to allow Dynegy to sell more electricity for its own account
on better terms throughout the North American market;
o The merger is expected to provide continuing shareholders, who desire to
invest in a full-service provider of energy products and services, an
investment vehicle having the flexibility and resources required to respond
to the numerous opportunities in the energy industry;
o The merger provides the liquidity needed to allow certain Dynegy
shareholders to reduce the size of their investment in Dynegy; and
o The merger improves public float thereby enhancing the Company's access to
equity capital at attractive cost.
Segment Discussion
In 1999, the Company reported its operations under two primary business
segments: the Energy Convergence and Midstream segments. As previously disclosed
herein, in 2000 the Company will add a third business segment consisting of the
regulated utility operations, operating under Illinois Power Company, acquired
in the Illinova acquisition. This segment will be referred to as the
Transmission and Distribution segment. A general description of the business
strategy employed by each segment is followed by a discussion of each segment's
component businesses.
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[GRAPH]
ENERGY CONVERGENCE SEGMENT
This segment is actively engaged in value creation through marketing
and trading of natural gas, power, coal, emissions and the generation of
electricity principally under the name Dynegy Marketing and Trade. Dynegy 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.
[GRAPH]
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
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its generation assets by providing national market access, market infrastructure
and intelligence, risk management and arbitrage opportunities, fuel management
and procurement expertise and transmission expertise for inputs (gas and coal)
and outputs (power). Generation capacity adds value to the company's wholesale
trading and marketing franchise by providing an outlet/market for gas and coal
supplies, a source of reliable power supply and an enhanced ability to structure
innovative new products and services for customers.
Concurrent with the restructuring of the U.S. Wholesale electricity
markets, Dynegy 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. The aforementioned acquisition of Illinova's unregulated
fossil-fuel generation complements this strategy both in terms of strategic
location and capacity. It is expected that approximately two-thirds of projected
capital expenditures over the next three years will be directed to the control
or ownership of generation assets designed to maximize value extraction through
execution of the Merchant Leverage Effect.
[GRAPH]
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 refers to this as
the "Incumbent Advantage." Dynegy's goal is to form a North American network of
regional retail energy alliances. In addition, Illinova Power Company and
Illinova Energy Partners, Inc. each have varying levels of retail gas and
electric operations. The Illinova retail operations include three distinct
strategies: commercial & industrial and retail commodity sales and services;
non-commodity energy related products and services; and, energy information
software products. Dynegy is assessing the strategic fit of these operations in
concert with its current retail strategy for the purpose of defining a coherent
retail strategy for the future. These combined operations are being managed
under the name Dynegy Energy Services. The integration of Illinova's retail
operations along with Dynegy's established strategy will accelerate Dynegy's
penetration of the retail gas and electric markets while reducing financial risk
during this period of regulatory uncertainty and restructuring. The following
chart provides geographic data on existing and targeted alliance markets.
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[GRAPH]
Dynegy's vision of the ultimate restructuring of the gas and
power marketing and power generation businesses in the united states is expected
to be replicated throughout Canada, the United Kingdom, Europe and other markets
as those markets open up to greater competition, subject to any unique
attributes associated with market deregulation in those areas. The company
maintains energy trading operations in Canada, the UK and europe and is
continuing to assess local, regional and national markets, regulatory
environments and other factors in order to support and direct future economic
investment.
MIDSTREAM SEGMENT
Since 1997, the midstream natural gas liquids industry has experienced
significant upheaval. Volatility in NGL prices from 1997 through 1999 has placed
significant pressure on operating margins within the industry. Despite
significant consolidation over the recent past, the domestic midstream industry
remains relatively fragmented and competition for additional inlet volumes
remains intense. Dynegy, along with other industry participants, has responded
to these industry conditions by aggressively reducing costs, rationalizing
assets in non-core operating areas and improving its competitive position in
core operating areas through asset consolidation and alliances. The principal
goal of these efforts is to mitigate the variability of earnings and cash flow
caused by fluctuations in commodity prices, while gaining and maintaining first
quartile operating performance against industry peers. From 1998 through early
2000, the Company disposed of certain non-core assets, principally in the
Mid-Continent region, combined regional operations through an alliance with an
industry partner and consolidated certain upstream and downstream operations to
achieve cost synergies. These efforts resulted in first quartile operating
performance in 1999, positioning the Company to concentrate its operations and
capital expenditure program in the strategic gulf coast area and any other areas
that management views as strategic. Dynegy believes that financial returns will
benefit from focusing its management and capital resources towards expanding
upstream and downstream opportunities arising as Gulf of Mexico natural gas
production increases, as world-wide liquids marketing activities become further
linked to the industry-wide southern Texas and Louisiana infrastructure and as
other developments in the natural gas industry arise, which complement the
Company's strategy.
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[GRAPH]
This segment principally operates under the name Dynegy Midstream
Services and consists of the North American midstream liquids operations, the
global liquefied petroleum gas transportation and the natural gas liquids
marketing operations, located primarily in Houston and in London, and certain
other businesses. The North American midstream liquids operations are actively
engaged in the gathering and processing of natural gas and the transportation,
fractionation and storage of NGLs. Major producers upstream and refiners
downstream have divested their ownership in midstream assets and operations over
the last decade. Traditionally, these operations provided intermediate service
and support functions within most integrated petroleum companies. Dynegy
believes that it can achieve significant cost and operating efficiencies as well
as attractive returns on services provided to the market from the independent
ownership and operation of these assets. Dynegy captures value throughout the
midstream service business model as shown below. 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.
[GRAPH]
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The Company is a recognized industry leader in substantially all
midstream component businesses, ranging from natural gas processing to marketing
NGLs to end users. During 1999, Dynegy was the second largest processor of
natural gas in the United States; it owned substantial fractionation capacity
exceeding three hundred thousand barrels per day and the Company marketed over
four hundred fifty thousand barrels of NGLs daily. These activities were
supported by an extensive storage and transportation system, which included in
excess of 14,000 miles of natural gas pipelines, 2,000 miles of crude oil
pipelines, 500 miles of NGL pipelines and 60 million barrels of NGL storage
capacity. To further assist its operations, the Company has access to
substantial barge, rail, trucking and terminalling assets as well as large-hull
ships having long-haul capabilities, which enhance international trading
opportunities. As discussed elsewhere, the Company is disposing of its
Mid-Continent natural gas processing and gathering assets during the first
quarter 2000.
OVERVIEW OF SEGMENT BUSINESSES
ENERGY CONVERGENCE SEGMENT - NATURAL GAS
The Company's wholesale natural gas marketing activities are conducted
throughout North America and in the United Kingdom. These activities consist of
contracting to purchase specific volumes of natural gas from suppliers at
various points of receipt to be supplied over a specific period of time;
aggregating natural gas supplies and arranging for the transportation of these
gas supplies through proprietary and third-party transmission systems;
negotiating the sale of specific volumes of natural gas over a specific period
of time to local distribution companies (LDCs), utilities, power plants and
other end-users; and matching natural gas receipts and deliveries based on
volumes required by customers.
NATURAL GAS PURCHASES. The Company purchases natural gas from a variety
of suppliers under contracts with varying terms and conditions intended to
ensure a stable supply of natural gas. When purchasing natural gas, the Company
considers price, location, liquids content, if applicable, and quantities
available. In 1999, the Company purchased natural gas in every major producing
basin in the United States and Canada from over 290 suppliers, ranging from
major producers to small independent companies. Pursuant to ancillary agreements
entered into as part of the Chevron Combination, Dynegy 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 1999, sales were made to approximately 820 customers located
throughout the contiguous United States and parts of Canada. For the year ended
December 31, 1999, the Company's North American operations sold an aggregate
average of 8.8 Bcf per day of natural gas.
NATURAL GAS STORAGE. Natural gas storage capacity plays an important
role in the Company's ability to act as a full-service natural gas marketer by
allowing it to manage relatively constant gas supply volumes with uneven demand
levels. Through the use of its storage capabilities, the Company offers peak
delivery services to satisfy winter heating and summer electric-generating
demands. Storage inventories also provide performance security or "backup"
service to the Company's customers. The Company at various times leases
short-term and long-term firm and interruptible storage.
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UNITED KINGDOM. The Company maintains an independent energy marketing
business through a wholly owned subsidiary in the United Kingdom. Additionally,
Dynegy owns a twenty-five percent participating preferred stock interest in
Accord Energy Limited ("Accord"), a U.K.-based energy marketing company. During
1999, the Company's U.K. subsidiary purchased product from 45 suppliers and
marketed sales to 46 customers. For the year ended December 31, 1999, the
Company's U.K.-based operations sold an aggregate average of 1.1 Bcf per day of
natural gas. Additionally, in 1999, the U.K. energy trading operation began
financial trading in the United Kingdom and the Norway Power Pool ("Nord Pool")
electricity markets.
ENERGY CONVERGENCE SEGMENT - POWER
Dynegy markets electricity and power products and services through
indirect wholly-owned subsidiaries, providing a 24-hour-a-day resource for the
sale and purchase of power through access to wholesale markets throughout North
America. The Company helps generation customers manage and optimize their fuel
supplies, optimize generation assets and capacity utilization and maximize
energy conversion and tolling opportunities. In addition, the Company provides
market aggregation and sales assistance and risk-management services and
strategies. The Company will at times contract for transmission capacity over
regulated transmission lines in order to facilitate regional movements of power.
In 1999, Dynegy made sales to approximately 200 customers and sold 67
million-megawatt hours of electricity.
Following the close of the Illinova acquisition, Dynegy had interests
in power projects in operation, under construction, in late stage development or
pending acquisition having combined gross capacity of 12,227 megawatts of
electricity. The Illinova acquisition added 4,989 megawatts of capacity to
Dynegy's portfolio; however, Dynegy was required by the federal Public Utility
Regulatory Policies Act of 1978 ("PURPA") to divest or restructure its interests
in certain qualified facilities, as a condition precedent to closing the
Illinova acquisition. Such interests were divested on February 1, 2000,
resulting in the loss of 709 gross megawatts of capacity. Approximately 64
percent of owned capacity is gas-fired and a majority of the gas-fired capacity
is held through interests owned in joint ventures or other similar financial
structures. In addition to ownership and operation of generating capacity, the
Company may, at times, provide services to the ventures in which it owns an
interest in the areas of project development, engineering, environmental
affairs, operating and maintenance services, business management and fuel supply
services. Such management services include:
o Engineering oversight of all conceptual planning, feasibility studies,
environmental studies and plant, engineering and construction design;
o Specialized and comprehensive operating, maintenance, testing and start-up
services;
o Power and fuel management involving purchases and sales for and from the
projects;
o Contract negotiation;
o Development and maintenance of business plans and forecasts;
o Development and implementation of profit improvement opportunities;
o Monitoring regulatory, legislative, and environmental affairs; and
o Providing various accounting and financial services.
MIDSTREAM SEGMENT - NATURAL GAS GATHERING AND PROCESSING
The natural gas processing industry is a major segment of the oil and
gas industry, providing the necessary service of refining raw natural gas into
marketable pipeline quality natural gas and natural gas liquids. The Company
owns interests in 38 gas processing plants, including 24 plants that it
operates, as well as associated and stand-alone natural gas gathering pipeline
systems. These assets are primarily located in the key producing areas of New
Mexico, Texas, Louisiana, Arkansas, Oklahoma, Kansas and Alberta, Canada.
During 1999, the Company processed an average of 2.9 Bcf per day of
natural gas and produced an average of 123 thousand barrels per day of natural
gas liquids. As part of the Chevron Combination's ancillary agreements, Dynegy
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.
Through two transactions, one in December 1999 and one in January 2000,
the company agreed to sell its Mid-Continent natural gas processing and
gathering facilities. These facilities were non-strategic, were under-performing
in comparison to other assets in its portfolio and exposed Dynegy to commodity
price risk that was difficult to mitigate on a consistent basis. The December
sale has closed and the January sale is
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set to close in March 2000. During 1999, these combined assets processed an
average of 362 Bcf per day of natural gas and produced an average of 30 thousand
barrels per day of natural gas liquids. As part of the December 1999 sale,
Dynegy executed a purchase and sale contract to acquire substantially all of the
natural gas liquids processed by certain of these natural gas processing plants
for a period of three years. The aggregate sales proceeds from these sales
approximated $422 million and the Company recognized no material gain or loss on
either transaction.
MIDSTREAM SEGMENT - FRACTIONATION
Natural gas liquids removed from the natural gas stream at gas
processing plants are generally in the form of a commingled stream of liquid
hydrocarbons (raw product). The commingled natural gas liquids are separated at
fractionation facilities into the component products of ethane, propane, normal
butane, isobutane and natural gasoline. The Company has ownership interests in
three fractionation facilities; two in Mont Belvieu, Texas and one in Lake
Charles, Louisiana. During 1999, these facilities fractionated an average of 327
thousand gross barrels per day.
MIDSTREAM SEGMENT - NGL MARKETING
In North America, the Company markets its own NGL production and also
purchases NGLs from third parties for resale. Dynegy also markets and trades
LPGs throughout the world through use of chartered large-hull ships. Product
marketed and traded by this business is acquired from producing areas in the
North Sea, West Africa, Algeria and the Arabian Gulf as well as from the U.S.
Gulf Coast region. During 1999, the Company sold approximately 537 thousand
barrels per day of natural gas liquids to over 820 customers from these
operations.
MIDSTREAM SEGMENT - TRANSPORTATION OPERATIONS
The Company's transportation assets are inter-connected with the
nation's gas liquids and natural gas pipeline systems. Through this network of
pipeline connections, terminals, rail cars, trucks, barges and storage
facilities, the Company moves natural gas liquids from producing regions in the
Gulf Coast, West and Midwest to most major domestic and international markets.
The Company operates large-scale marine terminals in Texas, Florida and
Louisiana, which offer importers a variety of methods for transporting products
to the marketplace. In addition, Dynegy 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.
MIDSTREAM SEGMENT - CRUDE OIL MARKETING
During 1999, Dynegy placed its domestic crude oil marketing operations
for sale, as the business was not considered strategic or complementary to the
organization's long-term strategy. Divestiture of these operations is expected
to occur in the first quarter 2000. During 1999, the Company sold approximately
207 thousand barrels per day of crude oil to over 100 customers. The Company
will continue crude oil marketing operations in Canada, through a wholly owned
Canadian subsidiary.
BUSINESS RISK MANAGEMENT ASSESSMENT
Dynegy's operations and periodic returns are impacted by a myriad of
factors, some of which may not be mitigated by risk management methods. These
risks include, but are not limited to, commodity price, interest rate and
foreign exchange rate fluctuations, weather patterns, counterparty risk,
management estimations, strategic investment decisions, changes in competition,
operational risks, environmental risks and changes in regulation.
The Company is exposed to commodity price variability related to its
natural gas, natural gas liquids, crude oil, electricity and coal businesses. In
addition, fuel requirements at its power generation and gas processing
facilities represent additional commodity price risks to the Company. In order
to manage these commodity price risks, Dynegy routinely utilizes certain types
of fixed-price forward 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:
o Manage and hedge its fixed-price purchase and sales commitments;
o Provide fixed-price commitments as a service to its customers and suppliers;
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o Reduce its exposure to the volatility of cash market prices;
o Protect its investment in storage inventories; and
o Hedge fuel requirements at its gas processing and power generation
facilities.
The Company may, at times, have a bias in the market, within
established guidelines, resulting from the management of its portfolio. In
addition, as a result of marketplace liquidity and other factors, the Company
may, at times, be unable to fully hedge its portfolio for certain market risks.
Dynegy monitors its exposure to fluctuations in interest rates and foreign
currency exchange rates and may execute swaps, forward-exchange contracts or
other financial instruments to hedge and manage these exposures.
The Company employs the mark-to-market method of accounting for a
portion of its operations, which accounts for all energy trading activities at
fair value as of each balance sheet date and recognizes currently in its results
of operations the net gains or losses resulting from the revaluation of these
contracts. As a result, substantially all of the operations of the Company's
world-wide gas marketing, power marketing, and crude marketing operations are
accounted for under a mark-to-market accounting methodology. In certain of these
markets, long-term contract commitments may extend beyond the period in which
market quotations for such contracts are available. The lack of long-term
pricing liquidity requires the use of mathematical models to value these
commitments under the accounting method employed. These mathematical models
utilize historical market data to forecast future elongated pricing curves,
which are used to value the commitments that reside outside of the liquid market
quotations. The application of forecasted pricing curves to contractual
commitments may result in realized cash returns on these commitments that vary,
either positively or negatively, from the results estimated through application
of the mathematical model. Dynegy believes that its mathematical models utilize
state-of-the-art technology, pertinent industry data and prudent discounting in
order to forecast certain elongated pricing curves.
Dynegy's commercial groups manage, on a portfolio basis, the resulting
market risks inherent in commercial transactions, subject to parameters
established by the Dynegy Board of Directors. Market risks are monitored by a
risk control group that operates independently from the commercial units that
create or actively manage these risk exposures to ensure compliance with
Dynegy's risk management policies. Risk measurement is also practiced against
the Dynegy portfolios with value at risk, stress testing and scenario analysis.
In addition to risks associated with price or interest rate movements,
credit risk is also inherent in the Company's operations. Credit risk relates to
the risk of loss resulting from the nonperformance of contractual obligations by
a counterparty. Dynegy maintains credit policies with regard to its
counterparties, which management believes minimize its overall credit risk.
Dynegy's stated business strategy is to expand ownership or control of
merchant generation capacity in select markets across the country. Dynegy
believes that merchant generation capacity, which is designed principally to
supply power to markets during periods of peak demand, offers the greatest
flexibility in executing its strategy of an integrated gas and power marketing
and power generation business. This strategy heightens the risk for volatility
in periodic returns by increasing the Company's exposure to variability in
anticipated demand resulting from:
o changing weather patterns,
o unexpected delays in industry-wide construction of new capacity,
o unforeseen supply constraints or bottlenecks resulting from transmission
failures or other factors,
o unforeseen new technologies, and
o other similar factors.
Further, as Dynegy moves forward with the execution of its strategic
plan to own or control 70,000 megawatts of capacity within five years, risk of
earnings volatility increases through exposure to unanticipated variability in
generation capacity dependability factors. As a result of supply contracts
routine in the industry, Dynegy's exposure relating to performance by these
generating assets resides not only with owned and controlled assets, but also
with third-party operated facilities. The volatility of earnings, whether it be
favorable or unfavorable, will likely be most profound during periods of peak
demand when, and if, regional industry-wide generation capacity fails or is
curtailed. The increasing importance of and dependency upon physical generation
of electricity as a percentage of Dynegy's overall portfolio and strategy may
substantially alter Dynegy's earnings risk profile over time.
Finally, the addition of these generation assets to Dynegy's portfolio
may increase enterprise exposure to environmental and regulatory laws and
regulations. These exposures could result in increased expenditures for capital
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improvements to meet certain statutory requirements and could result in
expenditures for remediation of unanticipated environmental contamination. The
potential redirection of capital to these types of expenditures could reduce the
level of available discretionary capital currently expected to be used in
executing Dynegy's strategic plan in future periods.
Many of these risks are outside the control of Dynegy and may not be
fully mitigated through application of risk management methods and/or
state-of-the-art, first quartile power generation operating methods.
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 energy marketing and trading businesses with
international, national and regional full service energy providers, merchants,
producers and pipelines for sales based on its ability to aggregate
competitively priced supplies from a variety of sources and locations and to
utilize efficient transportation. With respect to its marketing and trading
operations, Dynegy believes that:
o E-Commerce will fast become the primary business enabler resulting in a
shift in how the industry conducts its business;
o Customers will increasingly scrutinize the financial condition of their
suppliers to assure that contract obligations will be met;
o Suppliers and transporters will demand more stringent credit terms to secure
performance;
o The increased role of full service energy providers may add to the financial
cost of doing business;
o Increasing availability of pricing information to participants in the
industry will continue to exert downward pressure on per-unit profit margins
in the industry;
o Suppliers will have to be multi-fuel marketers; and
o Large competitors having significant liquidity and other resources will
compete with Dynegy for similar business.
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. Further, Dynegy believes that technological advances in
executing transactions will differentiate the competition in the near term.
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
marketing and trading operations.
The demand for power may be met by generation capacity based on several
competing technologies, such as gas-fired or coal-fired cogeneration and power
generating facilities fueled by alternative energy sources including hydro
power, synthetic fuels, solar, wind, wood, geothermal, waste heat, solid waste
and nuclear sources. The 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 and crude oil marketing businesses
face significant competition from a variety of competitors including major
integrated oil companies, major pipeline companies and their marketing
affiliates and national and local gas gatherers, processors, brokers, marketers
and distributors of varying sizes and experience. The principal areas of
competition include obtaining gas supplies for gathering and processing
operations, obtaining supplies of raw product for fractionation, the marketing
of natural gas liquids, crude oil, residue gas, condensate and sulfur, and the
transportation of natural gas, natural gas liquids and crude oil. Competition
typically arises as a result of the location and operating efficiency of
facilities, the reliability of services and price and delivery capabilities. The
trend towards industry consolidation in the North American upstream liquids
businesses has resulted in a highly competitive market for acquisition and
development of such facilities. Dynegy's leadership position in this industry
provides unique opportunities to extract value from its investments. The Company
believes it has the infrastructure, long-term marketing abilities, financial
resources and management experience to enable it to effectively compete.
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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.
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 first quarter 2000, the FERC issued Order No. 637 which
changed the character of interstate transportation services. Interstate
pipelines will begin implementation of the new regulations in May 2000. The
Company does not believe that the terms of the FERC Order will adversely effect
its operations.
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 Alberta Canada, the AEUB governs the permitting, emissions and
operations of gas gathering and processing facilities. These facilities require
a permit from the AEUB to process or transport a specified volume of gas and a
demonstration at the time of application that the impact on the environment will
be minimal. Dynegy Canada Inc. holds all necessary permits required in order to
own and operate its processing and gathering facilities.
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Notwithstanding the jurisdiction of the AEUB, the rates, terms and conditions of
service of such facilities are generally the result of privately negotiated
arrangements.
GATHERING. The NGA exempts gas-gathering facilities from the
jurisdiction of the FERC. Interstate transmission facilities, on the other hand,
remain subject to FERC jurisdiction. The FERC has historically distinguished
between these two types of facilities on a fact-specific basis. Dynegy 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.
ELECTRICITY MARKETING REGULATION. The Federal Power Act ("FPA") and
rules promulgated by the FERC regulate the transmission of electric power in
interstate commerce and sales for resale of that power. As a result, portions of
these operations are under the jurisdiction of the FPA and FERC. In April 1996,
the FERC adopted rules ("Order 888") to expand transmission service and access
and provide alternative methods of pricing for transmission services. Order 888
is intended to open the FERC-jurisdictional interstate transmission grid in the
continental United States to all qualified persons that seek transmission
services to wheel wholesale power. Utilities are required to provide
transmission customers non-discriminatory open access to their transmission
grids with rates, terms, and conditions comparable to that which the utility
imposes on itself. Order 888 was upheld by the FERC in March 1997 and is subject
to appeal. Second generation implementation issues arising out of Order 888
abound. These include issues relating to power pool structures and transmission
pricing. These too will likely find their way to the courts, and their outcome
cannot be predicted.
In December, 1999, FERC issued Order 2000 addressing some of the
significant regional transmission issues. Transmission owning utilities are
required to file plans by October, 2000, to detail their participation in an
organization that will control the transmission facilities within a region.
Illinois Power will be required to make such a filing. The electric marketing
transactions of Dynegy may also be impacted by the functioning of these new
regional transmission organizations. The Order allows significant flexibility in
the structure of these new organizations and thus their impact on Dynegy's power
marketing business and Illinois Power's transmission operations cannot be
predicted.
POWER GENERATION REGULATION. Historically in the United States,
regulated and government-owned utilities have been the only significant
producers of electric power for sale to third parties. Pursuant to the enactment
of PURPA, companies other than utilities were encouraged to enter the electric
power business by reducing regulatory constraints. In addition, PURPA and its
implementing regulations created unique opportunities for the development of
cogeneration facilities by requiring utilities to purchase electric power
generated in cogeneration plants meeting certain requirements (referred to as
"Qualifying Facilities"). As a result of PURPA, a significant market for
electric power produced by independent power producers developed in the United
States. The exemptions from extensive federal and state regulation afforded by
PURPA to Qualifying Facilities are important to Dynegy and its competitors. To
meet the utility ownership limitation imposed on Qualifying Facilities by FERC
rules, Dynegy sold all or part of its interest in a number of Qualifying
Facilities prior to the Illinova acquisition. The remaining cogeneration
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
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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,
but not from the FPA. The Energy Act also provides the FERC with extensive new
authority to order electric utilities to provide other electric utilities,
Qualifying Facilities and independent power projects with access to their
transmission systems. However, the Energy Act does preclude the FERC from
ordering transmission services to retail customers and prohibits "sham"
wholesale energy transactions which appear to provide wholesale service, but
actually are providing service to retail customers.
The FPA grants the FERC exclusive ratemaking jurisdiction over
wholesale sales of electricity in interstate commerce. The FPA provides the FERC
with ongoing as well as initial jurisdiction, enabling the FERC to revoke or
modify previously approved rates. Such rates may be based on a cost-of-service
approach or on rates that are determined through competitive bidding or
negotiation on a market basis. Although Qualifying Facilities under PURPA are
exempt from ratemaking and certain other provisions of the FPA, independent
power projects (including EWGs) and certain power marketing activities are
subject to the FPA and to the FERC's ratemaking jurisdiction. Utilities are not
obligated to purchase power from projects subject to regulation by the FERC
under the FPA because they do not meet the requirements of PURPA. However,
because such projects would not be bound by PURPA's thermal energy use
requirement, they may have greater latitude in site selection and facility size.
All of the projects currently owned or operated by Dynegy as Qualifying
Facilities under PURPA are exempt from the FPA. Dynegy's EWGs, El Segundo, Long
Beach, Cabrillo I, Cabrillo II, Rocky Road, Commonwealth Atlantic and Hartwell,
are subject to the FPA and the jurisdiction of the FERC. With approval from
FERC, such entities, with certain exceptions, are exempted from being required
to sell at cost-based rates and can make all sales at market-based rates set
through negotiations. Independent power projects in which 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 (international projects
that sell power outside the United States are not
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subject to the FPA). For international projects, the principal basis for
exemption from PUHCA is by obtaining EWG status from the FERC. EWG status is
very beneficial for international projects because EWGs are generally allowed to
make retail sales in international markets. Another way to obtain an exemption
from PUHCA for foreign ownership and operation activities is by filing a foreign
utility company determination ("FUCO") with the Securities and Exchange
Commission. However, FUCO filings are less frequently used, because unlike EWGs,
no formal regulatory order is issued confirming the status of a FUCO. The
development of international power generation and transmission projects also may
entail other multi-national regulatory considerations arising under United
States law, including export/import controls, trade laws and other similar
legislation. Dynegy 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. Other state regulatory reforms
impacting the Company's processing and gathering operations and other businesses
are also 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.
ILLINOIS POWER COMPANY. As stated previously herein, Dynegy acquired an
electric and natural gas utility engaged in the transmission, distribution and
sale of electricity and natural gas. The acquisition of this business increases
the Company's exposure to regulation at both the federal and state levels as the
Company manages the operations of Illinois Power in concert with the rulings and
regulations handed down by FERC and the Illinois Commerce Commission,
respectively. Management is confident that it has the resources in place to
effectively manage the anticipated issues imposed by this regulation.
SHAREHOLDER AGREEMENT
Pursuant to the Illinova acquisition, Chevron entered into a
shareholder agreement with Dynegy, Illinova Holding and Dynegy Holding governing
certain aspects of the relationship of Chevron and Dynegy both before and after
the merger. The shareholder agreement addressed numerous issues, the more
significant of which are discussed below.
The shareholder agreement required Chevron to file with the SEC an
application seeking an exemption or exclusion from the registration requirements
under PUHCA that would otherwise apply to Chevron by virtue of its ownership
interest in Dynegy. Chevron filed a good faith application with the SEC seeking
exemption from the registration requirements under PUHCA prior to closing of the
merger. The application is pending at the SEC and the SEC may take action on
this application at any time as there is no time limit imposed on the SEC to
complete its review of such application. If, upon review, the SEC chooses to
deny or conditionally grant the application, Dynegy is obligated to take all
necessary actions to ensure that Chevron qualifies for an exemption under PUHCA.
These actions may include a divestiture of Dynegy's Transmission and
Distribution segment assets.
The shareholder agreement contains rights relating to and limitations
on acquisitions of common stock by Chevron. Chevron is entitled to preemptive
rights to acquire shares of common stock in proportion to its existing ownership
of Dynegy stock, whenever Dynegy issues shares of stock or securities
convertible into stock. In addition, Chevron may freely acquire up to 40 percent
of the outstanding voting securities of Dynegy. However, should any acquisition
by Chevron require Chevron to register under PUHCA, Dynegy has no obligation to
take any action to avoid that registration. If Dynegy subsequently redeems or
repurchases any shares, Chevron is not required to reduce its ownership
interest, even if Chevron's resulting ownership interest is in excess of 40%.
Any shares of Class A common stock acquired by Chevron will automatically
convert into Class B common stock.
If Chevron acquires more than 40 percent of Dynegy's voting securities,
it must make an offer to acquire all of the outstanding stock of Dynegy. For the
first year after the merger closes, Chevron may not make any such offer (or a
related acquisition) unless a third person seeks to acquire a 15% voting
interest in Dynegy. Thereafter, Chevron may make such an offer at any time. Any
offer by Chevron for all of the outstanding stock is subject to an auction
process. The shareholder agreement contains detailed provisions governing the
auction but, in general, Chevron at its election may either (1) participate in
the auction without any special priority or other rights vis-a-vis other
bidders, or (2) not participate in the auction and instead have the right to
purchase all of the outstanding stock of Dynegy at 105% of the bid selected by
Dynegy's board of directors. If Chevron agrees to purchase Dynegy at 105% of the
selected bid, the purchase agreement will contain customary termination
provisions including a 5%
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termination fee. If Chevron is not the successful bidder under either process,
it is obligated to vote in favor of the bid or tender its Dynegy shares, as the
case may be. However, if Chevron is the successful bidder, and Dynegy
subsequently terminates the agreement (and pays Chevron the 5 percent
termination fee), Chevron is free to tender for any and all stock of Dynegy and
to pursue any rights and remedies available to it. In this instance, Chevron
would not be required to support any alternative transaction which Dynegy might
then wish to pursue. Except in conjunction with a permitted offer, Chevron may
not become a participant in the solicitation of proxies concerning any
acquisition of voting securities of Dynegy.
The shareholder agreement generally prohibits Chevron from selling or
transferring any shares of Class B common stock for a period of one year
following the closing of the merger. Exceptions to this rule allow Chevron to
transfer these shares to an affiliate of Chevron and does not restrict
disposition or transfer of shares as required by any governmental regulatory
authority. After the one year restriction, Chevron may sell or transfer shares
of Class B common stock in the following transactions:
o in a widely-dispersed public offering; or
o a sale to an unaffiliated third party, provided that Dynegy is given the
opportunity to purchase, or to find a different buyer to purchase, the
shares proposed to be sold by Chevron.
Upon the sale or transfer to any person other than an affiliate of Chevron, the
shares of Class B common stock are automatically converted into shares of Class
A common stock.
The shareholder agreement provides that Dynegy may require Chevron and
its affiliates to sell all of the shares of Class B common stock under certain
circumstances. These rights are triggered if Chevron or its Board designees
block - which they are entitled to do under Dynegy's Bylaws - any of the
following transactions two times in any 24 month period or three times over any
period of time:
o the issuance of new shares of stock where the aggregate consideration to be
received exceeds the greater of $1 billion or one-quarter of Dynegy's total
market capitalization;
o any merger, consolidation, joint venture, liquidation, dissolution,
bankruptcy, acquisition of stock or assets, or issuance of common or
preferred stock, any of which would result in payment or receipt of
consideration having a fair market value exceeding the greater of $1 billion
or one-quarter of Dynegy's total market capitalization; or
o any other transaction or series of related transactions having a fair market
value exceeding the greater of $1 billion or one-quarter of Dynegy's total
market capitalization.
However, upon occurrence of one of these triggering events and in lieu of
selling Class B common stock, Chevron may elect to retain the shares of Class B
common stock but forfeit its right and the right of its board designees to block
the transaction listed above. A block consists of a vote against a proposed
transaction by either (a) all of Chevron's representatives on the board of
directors present at the meeting where the vote is taken (if the transaction
would otherwise be approved by the board of directors) or (b) any of the Class B
common stock held by Chevron and its affiliates if the transaction otherwise
would be approved by at least two-thirds of all other shares entitled to vote on
the transaction, excluding shares held by management, directors or subsidiaries
of Dynegy.
The shareholder agreement also prohibits Dynegy from taking the
following actions:
o issuing any shares of Class B common stock to any person other than Chevron
and its affiliates;
o amending any provisions in the articles of incorporation or bylaws which, in
each case, contain or implement the special rights of holders of Class B
common stock, without the consent of the holders of the shares to Class B
common stock or the three directors elected by such holders;
o adopting a shareholder rights plan, "poison pill" or similar device that
prevents Chevron from exercising its rights to acquire shares of common
stock or from disposing of its shares when required by Dynegy; and
o acquiring, owning or operating a nuclear power facility, other than being a
passive investor in a publicly-traded company that owns a nuclear facility.
The provisions of the shareholder agreement terminate as follows:
o The limitations on acquisitions and transfers by Chevron, the buyout rights,
the restrictions on certain actions of Dynegy and Chevron's preemptive
rights all terminate on the date Chevron and its affiliates cease to own
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shares representing at least 15 percent of the outstanding voting power of
Dynegy. At such time all of the shares of Class B common stock held by
Chevron would convert to shares of Class A common stock; and
o The remaining provisions (primarily relating to PUHCA) terminate on the date
Chevron and its affiliates cease to own shares representing at least 10
percent of the outstanding voting power of Dynegy.
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 remediate facilities that are abandoned or inactive or whose owners are
insolvent; however, the legislation may be applied to sites still in operation.
Superfund law imposes liability, regardless of fault or the legality of the
original conduct, on certain classes of persons that contributed to the release
of a "hazardous substance" into the environment. These persons include the
current or previous owner and operator of a facility and companies that
disposed, or arranged for the disposal, of the hazardous substance found at a
facility. CERCLA also authorizes the EPA and, in certain instances, private
parties to take actions in response to threats to public health or the
environment and to seek recovery for the costs of cleaning up the hazardous
substances that have been released and for damages to natural resources from
such responsible party. Further, it is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment. RCRA
provisions apply to facilities that have been used to manage or are currently
managing hazardous waste and which are either still in operation or have
recently been closed. As amended, RCRA requires facilities to remedy any
releases of hazardous wastes or hazardous waste constituents at waste treatment,
storage or disposal facilities.
The addition of fossil fuel-fired electric generation to Dynegy's
portfolio, acquired in the Illinova acquisition, increases Dynegy's exposure to
environmental regulation, as well as anticipated increased expenditures for
remediation requirements and capital costs associated with Clean Air Act
requirements and other federal and state legislation. Management is confident
that it has the resources in place to effectively manage the anticipated issues
imposed by this heightened regulation and the financial liquidity to address
anticipated expenditures associated with adherence to such regulation.
In connection with discrete asset acquisitions and sales, Dynegy 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.
Subject to resolution of the complaints filed by the U.S. Environmental
Protection Agency ("EPA") and the Department of Justice ("DOJ") against Illinois
Power Company, management believes that it is in substantial compliance with,
and is expected to continue to comply in all material respects with, applicable
environmental
17
<PAGE> 20
statutes, regulations, orders and rules. Further, to the best of management's
knowledge, other than the previously referenced complaints, there are no
existing, pending or threatened actions, suits, investigations, inquiries,
proceedings or clean-up obligations by any governmental authority or third party
relating to any violations of any environmental laws with respect to 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 $4 million in 1999. Total
environmental expenditures for both capital and operating maintenance and
administrative costs are not estimated to approximate $75 million in 2000,
inclusive of the assets purchased in the Illinova acquisition.
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.
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
At December 31, 1999, the Company employed approximately 1,319
employees at its administrative offices and approximately 1,144 employees at its
operating facilities. Approximately 108 employees at Company-operated facilities
are subject to collective bargaining agreements with one of the following
unions: the Oil, Chemical and Atomic Workers International Union, the Metal
Trades Council or the Communications, Energy and Paperworkers Union. Management
considers relations with both union and non-union employees to be satisfactory.
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.
18
<PAGE> 21
<TABLE>
<CAPTION>
SERVED WITH THE
NAME AGE * POSITION(S) COMPANY SINCE
<S> <C> <C> <C>
C. L. Watson 50 Chairman of the Board, Chief Executive Officer, 1985
and a Director of the Company
Stephen W. Bergstrom 42 President and Chief Operating Officer of 1986
Dynegy Inc., and a Director of the Company
John U. Clarke 47 Executive Vice President, Chief Financial Officer 1997
Kenneth E. Randolph 43 Senior Vice President, General Counsel and 1984
Secretary of the Company
</TABLE>
* As of April 1, 2000
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 in 1989. Prior to his employment with Clearinghouse, he
served as Director of Gas Sales for the Western United States for Conoco Inc.
Mr. Watson serves on the board of directors of Baker Hughes Incorporated.
Stephen W. Bergstrom, President and Chief Operating of Dynegy Inc. is
responsible for the day-to-day development and execution of Dynegy's strategy
across its operating business units. He is also a member of Dynegy's board of
directors. Mr. Bergstrom was formerly President and Chief Operating Officer of
Dynegy Marketing and Trade and Senior Vice President of Dynegy Inc., with
responsibility for natural gas and power marketing, supply and generation
functions. After joining Clearinghouse in 1986 as Vice President of Gas Supply,
Mr. Bergstrom was promoted to Senior Vice President of Gas Marketing and Supply
in 1987. In 1990, he was named Executive Vice President of Clearinghouse. Prior
to joining the Company, Mr. Bergstrom was Vice President of Gas Supply for Enron
Gas Marketing. Mr. Bergstrom began his professional career with Transco Energy
Company of Houston.
John U. Clarke, Executive Vice President, Chief Financial Officer,
joined the Company in April 1997 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. He is a
director of Natco Group, Inc.
Kenneth E. Randolph serves as Senior Vice President, General Counsel
and Secretary of the Company. He has served in this capacity for 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.
19
<PAGE> 22
ITEM 2. PROPERTIES
Current year operational activity conducted in these areas is discussed
under "Item 1. BUSINESS - General." Following is a description of such
properties owned by the Company at December 31, 1999.
POWER GENERATION FACILITIES
Dynegy has interests in twenty-eight power projects in operation, under
construction, in late stage development or pending acquisition. The majority of
these projects are cogeneration facilities operated by Dynegy. The portfolio
also includes one heat recovery plant. A cogeneration plant utilizes power
production technology that results in the sequential generation of two or more
useful forms of energy (e.g., electricity and steam) from a single fuel source
(e.g., natural gas). The Company's generation assets include projects that are
Qualifying Facilities or EWGs (including "Merchant Plants"). A Qualifying
Facility is operated under laws outlined in PURPA, by the FERC and by certain
state legislatures, as previously discussed herein, and typically sells the
power it generates to a single power purchaser. A Merchant Plant operates
independently from designated power purchasers and as a result will generate and
sell power to the market when market economics dictate that electricity prices
exceed the cost of production. Merchant Plants provide flexibility to the
Company in executing its Energy Convergence strategy. The combined gross
capacity of facilities in operation is approximately 5,687 megawatts of
electricity and over 3.6 million pounds per hour of steam. The following table
provides pertinent information concerning power projects owned by the Company:
<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 (3) 50 5 Port Arthur, TX Waste heat Great Lakes Carbon Corporation
CoGen Lyondell (3) Lessee (50%) 610 Channelview, TX Gas-fired Lyondell Chemical Company
Oyster Creek 50 424 Freeport, TX Gas-fired The Dow Chemical Company
Corona (1) 40 47 Corona, CA Gas-fired SOCAL Edison Company
Kern Front(1) 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company
High Sierra(1) 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company
Double "C" (1) 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company
San Joaquin (1) 100 48 Stockton, CA Gas-fired Pacific Gas & Electric Company
Chalk Cliff(1) 100 46 Kern County, CA Gas fired Pacific Gas & Electric Company
Badger Creek(1) 50 46 Kern County, CA Gas-fired Pacific Gas & Electric Company
McKittrick(1) (2) 100 46 McKittrick, CA Gas-fired Pacific Gas & Electric Company
Live Oak(1) (2) 50 46 Kern County, CA Gas-fired Pacific Gas & Electric Company
Crockett (1) 8 240 Crockett, CA Gas-fired Pacific Gas & Electric Company
Bear Mountain(1) 100 46 Bakersfield, CA Gas-fired Pacific Gas & Electric Company
El Segundo 50 1,020 El Segundo, CA Gas-fired Merchant Facility
Long Beach 50 560 Long Beach, CA Gas-fired Merchant Facility
Black Mountain 50 85 Las Vegas, NV Gas-fired Nevada Power Company
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 Ludington, MI Gas-fired Consumers Energy Company
Cabrillo I - Encina 50 1,008 Carlsbad, CA Gas-fired Merchant Facility
Cabrillo II - California CT 50 253 San Diego County, CA Gas-fired Merchant Facility
Rocky Road 50 250 East Dundee, IL Gas-fired Merchant Facility
-----
TOTAL 5,687
=================================================================================================================================
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
=================================================================================================================================
DEVELOPMENT PROJECTS
<S> <C> <C> <C> <C> <C>
Rockingham 100 800 Rockingham County, NC Gas-fired Duke Energy (3 years)
Calcasieu 100 155 Lake Charles, LA Gas-fired Merchant Facility
Heard County 100 500 Heard County, GA Gas-fired Merchant Facility
Palmetto Power 100 500 Osceola County, FL Gas-fired Merchant Facility
Bluegrass 100 500 Louisville, KY Gas-fired Merchant Facility
Rocky Road Expansion 50 100 East Dundee, IL Gas-fired Merchant Facility
CoGen Lyondell Expansion 50 155 Channelview, TX. Gas-fired Merchant Facility
------
Total 2,710
------
TOTAL CAPACITY 8,397
=================================================================================================================================
</TABLE>
(1) Interest in Qualifying Facility sold February 1, 2000 pursuant to PURPA
requirements.
(2) Dynegy's ownership increased to 100 percent in McKittrick effective October
1, 1999 and in Live Oak effective January 1, 2000.
(3) In December 1999, Dynegy's ownership/lessee interest decreased from 100
percent.
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, 1999, concerning the gas
processing plants and gathering systems in which Dynegy owns an interest.
<TABLE>
<CAPTION>
===============================================================================================================================
SUMMARY OF DYNEGY'S GAS PROCESSING FACILITIES
===============================================================================================================================
LOCATION TOTAL PLANT
---------------------------- ----------------------------
PRACTICAL 1999 INLET NGL
GAS PROCESSING FACILITIES % OWNED COUNTY/PARISH STATE CAPACITY (2) THROUGHPUT PRODUCTION
--------------------------------------- --------- ------------------ --------- -------------- ------------- ----------------
(MMcf/d) (1) (Bpd) (1)
<S> <C> <C> <C> <C> <C> <C>
OPERATED FIELD PLANTS -
Chico Complex (3) 100.00 Wise TX 100 77.8 11,520.8
Fashing 58.24 Atascosa TX 38 14.7 298.5
Gladys 100.00 Alberta Can. 15 4.3 37.0
Mazeppa 100.00 Alberta Can. 80 38.5 518.0
Sand Hills Complex (3) 100.00 Crane TX 200 147.0 14,588.9
Sherman (3) 100.00 Grayson TX 33 19.1 835.8
Sligo 100.00 Bossier LA 40 31.3 599.6
West Seminole (3) 40.14 Gaines TX 5 4.0 399.6
Versado Gas Processors Joint 63.00 Various TX / NM --- 147.6 18,456.7
Venture (7)
OPERATED STRADDLE PLANTS -
Barracuda 100.00 Cameron LA 190 187.6 5,278.5
Lowry (3) 100.00 Cameron LA 265 233.9 6,555.4
Stingray 100.00 Cameron LA 300 266.6 3,488.7
VESCO 23.00 Plaquemines LA 299 223.8 5,767.0
Yscloskey (5)(8) 27.71 St. Bernard LA 473 251.2 7,751.6
NON-OPERATED FIELD PLANTS -
Diamond M (3) 7.66 Scurry TX --- 0.7 53.3
Indian Basin (3) 16.35 Eddy NM 30 21.6 1,659.8
Snyder (3) (6) 3.25 Scurry TX 2 1.8 109.2
Waskom 33.33 Gregg TX 50 37.6 1,555.6
NON-OPERATED STRADDLE PLANTS -
Bluewater (8) 15.20 Acadia LA 122 27.6 424.9
Calumet (5) (8) 32.60 St. Mary's LA 300 256.2 5,676.4
Iowa 9.92 Jefferson LA 50 359.9 931.0
Davis
Patterson (8) 17.20 St. Mary's LA 3 5.8 199.5
Sea Robin (8) 0.80 Vermillion LA 187 5.2 205.2
Terrebone (8) 7.40 Terrebone LA 10 30.1 1,190.4
Toca (8) 13.80 St. Bernard LA 93 110.6 4,658.3
===============================================================================================================================
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
===============================================================================================================================
FIRST QUARTER 2000 DISPOSITIONS:
OPERATED FIELD PLANTS -
<S> <C> <C> <C> <C> <C> <C>
Binger (3) (9) 100.00 Caddo OK 10 7.3 795.3
Canadian Complex (3) (9) 100.00 Hemphill TX 25 20.5 1,947.1
Leedey (3) (9) 100.00 Roger Mills OK 50 26.8 2,495.5
Lefors Complex (3) (9) 100.00 Wheeler TX 13 10.0 2,786.0
Moores Orchard (3) (10) 100.00 Fort Bend TX 7 3.1 44.5
Niject (9) 00.16 Caddo OK 3 0.0 1.0
Ringwood (3) (9) 100.00 Major OK 75 18.5 1,666.5
Rodman (3) (9) 100.00 Garfield OK 65 55.5 4,999.4
OPERATED STRADDLE PLANTS -
Cheney (9) 100.00 Kingman KS 85 59.7 3,369.8
NON-OPERATED FIELD PLANTS -
Spivey (4) (5) (9) 5.16 Harper KS 3 10.1 35.5
Dover Hennessey (3) (9) 18.29 Kingfisher OK 14 4.9 516.0
Maysville (3) (9) 44.00 Garvin OK 59 35.6 4,916.1
===============================================================================================================================
</TABLE>
(1) Capacity, throughput and gross production are net to the Company's
ownership interest.
(2) Capacity data is at practical recovery rates, net to Dynegy's interest.
(3) Dynegy owns the indicated percentage of an associated gas gathering system.
(4) Dynegy owns 2.48 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) 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.
(8) Dynegy ownership change attributable to a swap with Texaco reducing our
interest in Sea Robin in exchange for an increased interest in this
facility.
(9) A definitive purchase and sale agreement was signed on January 28, 2000 for
the sale of this plant. Sale expected to be completed by March 2000.
(10) This plant was sold in January 2000.
FRACTIONATION FACILITIES
The following table provides certain information concerning stand alone
fractionation facilities in which Dynegy owns an interest.
<TABLE>
<CAPTION>
==========================================================================================================================
SUMMARY OF DYNEGY'S FRACTIONATION FACILITIES (1)
==========================================================================================================================
PERCENT 1999
FRACTIONATION FACILITIES OWNED GROSS CAPACITY (2) NET CAPACITY (2) INLET THROUGHPUT
- ------------------------------------------------- ---------- -------------------- ------------------- --------------------
(MBbls/d) (MBbls/d) (MBbls/d)
<S> <C> <C> <C> <C>
Lake Charles, La. (3) 100.00 55 55 38
Cedar Bayou Fractionators (Mont Belvieu, Tx.) 88.00 205 180 178
Gulf Coast Fractionators (Mont Belvieu, Tx.) 38.75 110 42 111
==========================================================================================================================
</TABLE>
(1) Table does not include fractionation operations at VESCO or at other gas
processing facilities.
(2) Gross capacity data is at practical recovery rates and net capacity is at
practical rates multiplied by Dynegy's interest.
(3) The Lake Charles, La. Fractionator extracts ethane and propane only.
22
<PAGE> 25
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>
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 1999 THROUGHPUT (1) STATES DESCRIPTION
- ---------------------------------------- --------- --------------------- --------------- -------------------------------
<S> <C> <C> <C> <C>
Crude Oil Pipeline System 100.00 28.0 TX/OK Crude oil pipelines
Kansas Gas Supply (2) 100.00 54.2 KS/OK Intrastate natural gas pipeline
Dynegy NGL Pipeline 100.00 26.0 TX/LA Interstate liquids pipeline
Pelican Pipeline 100.00 29.0 LA Gas gathering pipeline
Vermillion Pipeline 100.00 8.1 Gulf of Mexico Gas gathering pipeline
Western Gas Gathering (2) 100.00 2.6 KS Gas gathering pipeline
Pawnee Rock (2) 100.00 10.6 KS Gas gathering pipeline
Seahawk 100.00 26.4 LA Intrastate natural gas pipeline
Dynegy Midstream Pipeline, Inc. (2) 100.00 44.4 OK Interstate natural gas pipeline
Dynegy Intrastate Gas Supply (2) 100.00 4.9 TX Intrastate natural gas pipeline
Lake Boudreaux 100.00 0.8 LA Gas gathering pipeline
Grand Lake Liquids System 100.00 2.5 LA Intrastate liquids pipeline
Gregg Lake 36.00 19.7 Alberta, Can. Gas gathering pipeline
==================================================================================================================================
</TABLE>
1. 1999 throughput is based on thousands of barrels per day for the liquids
and crude lines and million cubic feet per day for the gas gathering and
transportation lines.
2. A definitive purchase and sale agreement was signed on January 28, 2000 for
the sale of this asset. Sale expected to be completed by March 2000.
23
<PAGE> 26
OTHER PROPERTY INFORMATION
Dynegy owns a 39 percent interest in a partnership that owns and
operates the West Texas LPG Pipeline, an interstate LPG pipeline. The interest
was acquired in the Chevron Combination.
In 1996, the Company and Chevron formed Venice Gas Processing Company,
a Texas limited partnership ("Venice"). Venice was formed for the purpose of
owning and operating the Venice Complex, located in Plaquemines Parish,
Louisiana. The complex includes 271 miles of pipeline that extends into the Gulf
of Mexico having capacity of 810 MMcf/d, a lean oil gas processing plant, a
35,000 barrel per day fractionator, a 299 MMcf/d cryogenic gas processing unit,
12 million barrels of NGL storage capacity, a marine terminal and acreage. In
1997, Venice reorganized as a limited liability company changing its name to
VESCO. In September 1997, the VESCO members agreed to expand ownership in VESCO
to include an affiliate of Shell Midstream Enterprises, a subsidiary of Shell
Oil Company ("Shell"), effective September 1, 1997, in exchange for Shell's
commitment of certain offshore reserves to VESCO. In 1998, ownership in the LLC
was again expanded to include Koch, in exchange for their contribution of the
cryogenic processing unit. At December 31, 1999, Dynegy's interest in VESCO
approximated 23 percent. Dynegy operates the facility and has commercial
responsibility for product distribution and sales.
TITLE TO PROPERTIES
The Company believes it has satisfactory title to its properties in
accordance with standards generally accepted in the energy industry, subject to
such exceptions which, in the opinion of the Company, would not have a material
adverse effect on the use or value of said properties.
The operating agreements for certain of the Company's natural gas
processing plants and fractionation facilities grant a preferential purchase
right to the plant owners in the event that any owner desires to sell its
interest. Such agreements may also require the consent of a certain percentage
of owners before rights under such agreements can be transferred. The Company is
subject, as a plant owner under such agreements, to all such restrictions on
transfer of its interest. In a few instances, the Company has granted rights of
first refusal with respect to any future sale of certain assets. Certain of the
Company's power generation assets are subject to rights of first refusal or
consent requirements with the Company's partners or power purchasers which
restrict the transfer of interests in the facilities.
Substantially all of Dynegy'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
Through its acquisition of Destec Energy Inc., Dynegy became a party to
certain litigation with Pacific Gas and Electric Company ("PG&E") and with the
Southern California Gas Company ("SOCAL"). These cases represent pre-acquisition
contingencies acquired by the Company and settlement thereof did not have a
material adverse effect on the Company's results of operations or financial
position. The following describes resolution of these two cases.
In April 1997, PG&E had filed a lawsuit in the Superior Court of the
State of California, City and County of San Francisco, against Destec Energy,
Inc., Destec Holdings, Inc. and Destec Operating Company (wholly-owned
subsidiaries of the Company now known respectively as Dynegy Power Corp., Dynegy
Power Holdings,
24
<PAGE> 27
Inc. and Dynegy Operating Company) as well as against San Joaquin CoGen Limited
("San Joaquin") and its general partners (collectively the "Dynegy Defendants").
In the lawsuit, PG&E asserted claims and alleged unspecified damages for fraud,
negligent misrepresentation, unfair business practices, breach of contract and
breach of the implied covenant of good faith and fair dealing. Subsequent to the
acquisition of Destec Energy Inc. by Dynegy, Dynegy and PG&E engaged in
settlement discussions, which resulted in the execution of a Termination and
Settlement Agreement between PG&E and the Dynegy Defendants on March 9, 1999
(the "PG&E Settlement Agreement"). The PG&E Settlement Agreement provided for,
upon the receipt of CPUC approval, a dismissal with prejudice of PG&E's claims
against the Dynegy Defendants, a release by PG&E of all claims relative to FERC
matters and a termination of the San Joaquin power purchase agreement as of
December 31, 1999, whereupon the San Joaquin facility would continue to operate
as a merchant plant. Upon termination of the power purchase agreement, Dynegy
would repay project debt of approximately $26 million. By Order dated October 7,
1999, the CPUC approved the PG&E Settlement Agreement. The CPUC approval became
final on November 8, 1999.
Pursuant to its lawsuit against Dynegy, PG&E had named
Libbey-Owens-Ford ("LOF"), San Joaquin's steam host, as an additional defendant
in the action in October 1997. It is alleged that San Joaquin was liable to PG&E
under the Gas Transportation Agreement or Power Purchase Agreement due to LOF's
failure to use sufficient quantities of steam as required to retain its status
as a qualifying facility under federal standards. The Dynegy Defendants will
seek to recover from LOF losses resulting from the settlement with PG&E.
In March 1995, SOCAL had filed a lawsuit in the Superior Court of the
State of California for the County of Los Angeles, against Destec Energy, Inc.,
Destec Holdings and Destec Gas Services, Inc. (now known respectively as Dynegy
Power Corp., Dynegy Holdings, Inc. and Dynegy Gas Services, Inc.), wholly-owned
direct and indirect subsidiaries of the Company (collectively, the
"Defendants"), as well as against Chalk Cliff Limited and McKittrick Limited
(collectively, the "Partnerships"). All general partners of the Partnerships
were also named defendants. The lawsuit alleged breach of contract against the
Partnerships and their respective general partners, and interference and
conspiracy to interfere with contracts against the Defendants. The breach of
contract claims arose out of the "transport-or-pay" provisions of the gas
transportation service agreements between the Partnerships and SOCAL. SOCAL
sought damages from the Partnerships for past damages and anticipatory breach
damages in an amount equal to approximately $31 million. Subsequent to the
acquisition of Destec Energy Inc. by Dynegy, Dynegy and SOCAL engaged in
settlement discussions, which resulted in the execution of a Settlement
Agreement between SOCAL and all defendants in the pending litigation on August
25, 1999, (the "SOCAL Settlement Agreement"). The SOCAL Settlement Agreement was
approved by the CPUC and is final. The Settlement Agreement provided for the
dismissal of the pending litigation, the termination of underlying gas
transmission service contracts, and Dynegy's payment of settlement consideration
approximating $31 million. The pending appeals were dismissed and the litigation
and the associated foreclosure proceedings have therefore come to an end.
On August 3, 1998, Modesto Irrigation District ("MID") filed a lawsuit
against PG&E and Destec in federal court for the Northern District of
California, San Francisco division. The lawsuit alleges violation of federal and
state antitrust laws and breach of contract against Destec. The allegations are
related to a power sale and purchase arrangement in the city of Pittsburg, CA.
MID seeks actual damages from PG&E and Destec in amounts not less than $25
million. MID also seeks a trebling of any portion of damages related to its
antitrust claims. By order dated February 2, 1999, the federal District Court
dismissed MID's state and federal antitrust claims against PG&E and Destec;
however, the Court granted MID leave of thirty days to amend its complaint to
state an antitrust cause of action. On March 3, 1999, MID filed an amended
complaint recasting its federal and state antitrust claims against PG&E and
Destec and restating its breach of contract claim against Destec. PG&E and
Destec have filed motions to dismiss MID's revised federal and state antitrust
claims. The hearing on the motions to dismiss was held in July 1999. On August
20, 1999, the District Court again dismissed MID's antitrust claims against PG&E
and Destec, this time without leave to amend the complaint. As a result of the
dismissal of the antitrust claims, the District Court also dismissed the pendant
state law claims. MID has appealed the District Court's dismissal of its suit to
the Ninth Circuit Court of Appeal. Following dismissal of its federal court
suit, MID filed suit in California state court asserting its breach of contract
claims against Destec and its tortious interference with contract claims against
PG&E. Motions to dismiss MID's state court claims are pending and scheduled for
hearing during the first quarter 2000. Dynegy believes the allegations made by
MID are meritless and will continue to vigorously defend MID's claims. In the
opinion of management, the amount of ultimate liability with respect to these
actions will not have a material adverse effect on the financial position or
results of operations of the Company.
On July 30, 1999, The Dow Chemical Company ("Dow") filed a lawsuit in
the United States District Court for the District of Delaware against Dynegy
Power Corporation ("DPC"), a wholly-owned subsidiary of the Company. Dow sought
contribution from DPC in connection with claims against Dow asserted by The AES
25
<PAGE> 28
Corporation ("AES") in a lawsuit filed on November 30, 1998 in the United States
District Court for the Southern District of Texas. AES asserts various federal
and Texas securities laws claims, and Texas claims for fraud and civil
conspiracy, arising out of AES' September 1997 purchase of stock of Destec
Engineering, a subsidiary of DPC (at that time Destec Power Corp). Specifically,
AES alleges that Destec Power made certain misrepresentations about the expected
profits that Destec Engineering would earn in connection with the construction
of the Elsta power plant in The Netherlands, and the anticipated completion date
of the Elsta plant. AES alleges that Dow is liable because it "controlled" or
had the power to control the management of Destec Power. AES's original
complaint did not assert any claims against Destec Power or any other Dynegy
entity. Dow is vigorously defending against AES' claims. In response to a motion
to transfer filed by Dow, the United States District Court for the Southern
District of Texas transferred the suit to the United States District Court for
Delaware. Following transfer of the litigation, AES added DPC as a defendant,
asserting claims similar to the claims asserted against Dow. Dow subsequently
dismissed the suit against DPC without prejudice. AES and DPC have reached a
settlement of AES's claims against DPC. The settlement is currently before the
District Court for approval. If approved by the District Court, the settlement
will result in the dismissal of AES's suit against DPC with prejudice. In the
opinion of management, the ultimate resolution of this lawsuit will not have a
material adverse effect on the Company's financial position or results of
operations.
COMPLAINT AGAINST ILLINOIS POWER COMPANY. On November 3, 1999, the U.S.
Environmental Protection Agency ("EPA") issued a Notice of Violation ("NOV")
against Illinois Power Company ("Illinois Power") and, with the Department of
Justice ("DOJ"), filed a Complaint against Illinois Power in the U.S. District
Court for the Southern District of Illinois, No. 99C833. Similar notices and
lawsuits have been filed against a number of other utilities. Both the NOV and
Complaint allege violations of the Clean Air Act and regulations thereunder.
More specifically, both allege, based on the same events, that certain equipment
repairs, replacements and maintenance activities at Illinois Power's three
Baldwin Station generating units constituted "major modifications" under either
or both the Prevention of Significant Deterioration and the New Source
Performance Standards regulations. When non-exempt "major modifications" occur,
the Clean Air Act and related regulations generally require that generating
facilities meet more stringent emissions standards. The DOJ amended its
complaint to assert the claims found in the NOV. Illinois Power is filing
responsive pleadings in the first quarter 2000.
The regulations under the Clean Air Act provide certain exemptions to
the definition of "major modifications," particularly an exemption for routine
repair, replacement or maintenance. The Company has analyzed each of the
activities covered by the EPA's allegations and believes each activity
represents prudent practice regularly performed throughout the utility industry
as necessary to maintain the operational efficiency and safety of equipment. As
such, the Company believes that each of these activities is covered by the
exemption for routine repair, replacement and maintenance and that the EPA is
changing, or attempting to change through enforcement actions, the intent and
meaning of its regulations.
The Company also believes that, even if some of the activities in
question were found not to qualify for the routine exemption, there were no
increases either in annual emissions or in the maximum hourly emissions
achievable at any of the units caused by any of the activities. The regulations
provide an exemption for increased hours of operation or production rate and for
increases in emissions resulting from demand growth.
Although none of Illinois Power's other facilities are covered in the
Complaint and NOV, the EPA has officially requested information concerning
activities at Illinois Power's Vermilion, Wood River and Hennepin Plants. It is
possible that the EPA will eventually commence enforcement actions against those
plants as well.
The EPA has the authority to seek penalties for the alleged violations
in question at the rate of up to $27,500 per day for each violation. The EPA
also will be seeking installation of "best available control technology"
("BACT") (or equivalent) at the Baldwin Station and possibly at the other three
plants as well.
The Company believes that the EPA's and DOJ's claims are without merit,
and that the ultimate resolution of this lawsuit will not have a material
adverse effect on the Company's financial position or results of operations.
The Company assumed liability for various claims and litigation in
connection with the Illinova acquisition, 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
26
<PAGE> 29
operations. Further, the Company is subject to various legal proceedings and
claims, which arise in the normal course of business. In the opinion of
management, the amount of ultimate liability with respect to these actions will
not have a material adverse effect on the financial position or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting (the "Special Meeting") of the stockholders of Dynegy
was held on October 11, 1999. The purpose of the Special Meeting was to consider
and vote upon (i) the Agreement and Plan of Merger, dated as of June 14, 1999
(the "Merger Agreement"), by and among Illinova Corporation, Energy Convergence
Holding Company, Energy Convergence Acquisition Corporation, Dynegy Acquisition
Corporation and Dynegy Inc. and (ii) approve the adoption of the Dynegy Inc.
2000 Long Term Incentive Plan (the "Long Term Incentive Plan").
The following votes were cast with respect to the approval and adoption of the
Merger Agreement and the Long Term Incentive Plan, respectively:
<TABLE>
<CAPTION>
LONG TERM INCENTIVE
MERGER AGREEMENT PLAN
<S> <C> <C>
For: 144,443,075 133,007,249
Against/Withheld 141,719 11,520,574
Abstentions: 4,033 31,504
Broker Non-Votes: --- ---
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Class A Common Stock, no par value ("Class A Common
Stock") is listed and traded on the New York Stock Exchange under the ticker
symbol "DYN". The number of stockholders of record of the Class A Common Stock
as of February 28, 2000, was 35,713.
The following table sets forth the high and low closing prices for
transactions involving the Company's common stock for each calendar quarter
(prior to consummation of the Illinova transaction), as reported on the New York
Stock Exchange Composite Tape and related dividends paid per common share during
such periods.
<TABLE>
<CAPTION>
==================================================================================================================
SUMMARY OF DYNEGY'S COMMON STOCK PRICE AND DIVIDEND PAYMENTS
==================================================================================================================
HIGH LOW DIVIDEND
----------- ----------- ------------
<S> <C> <C> <C>
1999:
Fourth Quarter $ 24.313 $ 20.375 $ 0.0125
Third Quarter 24.375 20.250 0.0125
Second Quarter 20.750 14.250 0.0125
First Quarter 15.000 10.250 0.0125
1998:
Fourth Quarter $ 15.250 $ 10.250 $ 0.0125
Third Quarter 14.063 9.563 0.0125
Second Quarter 15.375 12.500 0.0125
First Quarter 17.250 14.625 0.0125
==================================================================================================================
</TABLE>
Prior to consummation of the Illinova acquisition, the holders of the
common stock were entitled to receive dividends if, when and as declared by the
Board of Directors of the Company out of funds legally available
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<PAGE> 30
therefor. Consistent with the Board of Directors' intent to establish a policy
of declaring quarterly cash dividends, a cash dividend of $0.0125 per share was
declared and paid in each quarter during 1999 and 1998. The holders of the
Series A Preferred Stock were entitled to receive dividends or distributions
equal per share in amount and kind to any dividend or distribution payable on
shares of the Company's common stock, when and as the same are declared by the
Company's Board of Directors. Accordingly, the Company also paid quarterly cash
dividends on its Series A Preferred Stock of $0.0125 per share, or $0.05 per
share on an annual basis.
In 2000, Dynegy's Class A and Class B common stock will be entitled to
a $0.60 per share dividend if, when and as declared by the Board of Directors of
the Company out of funds legally available therefor. The Class B common stock
has certain conversion features and maintains certain preemptive rights under
the shareholder agreement. The holders of the Series A Convertible Preferred
Stock are entitled to receive dividends or distributions totaling $3.00 per
share annually if and when declared by the Board of Directors of the Company out
of funds legally available therefor. Dividends on the preferred shares are
cumulative from the date of issuance and are payable quarterly on the last day
of March, June, September and December. The preferred stock carry certain
priority, liquidation, redemption, conversion and voting rights not available to
the common shareholders.
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<PAGE> 31
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information presented below was derived from,
and is qualified by reference to, the Consolidated Financial Statements of the
Company, including the Notes thereto, contained elsewhere herein. The selected
financial information should be read in conjunction with the Consolidated
Financial Statements and related Notes and Management's Discussion and Analysis
of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
==================================================================================================================
DYNEGY'S SELECTED FINANCIAL DATA
==================================================================================================================
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------ ------------ ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1) :
Revenues $ 15,429,976 $ 14,257,997 $ 13,378,380 $ 7,260,202 $ 3,665,946
Operating margin 543,875 428,687 385,294 369,500 194,660
General and administrative expenses 200,717 185,708 149,344 100,032 68,057
Depreciation and amortization expense 129,458 113,202 104,391 71,676 44,913
Asset impairment, abandonment
Severance and other charges --- 9,644 275,000 --- ---
Net income (loss) $ 151,849 $ 108,353 $ (102,485) $ 113,322 $ 92,705
Earnings (loss) per share (3) $ 0.91 $ 0.66 $ (0.68) $ 0.83 $ 0.82
Pro forma earnings per share (3) n/a n/a n/a n/a $ 0.40
Shares outstanding 166,975 164,605 167,009 136,099 113,176
Cash dividends per common share $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05
CASH FLOW DATA:
Cash flows from operating activities $ 8,839 $ 250,780 $ 278,589 $ (30,954) $ 90,648
Cash flows from investment activities (318,664) (295,082) (510,735) (111,140) (310,623)
Cash flows from financing activities 326,688 49,622 204,984 176,037 221,022
OTHER FINANCIAL DATA:
EBITDA (4) $ 450,780 $ 363,517 $ 291,899 $ 289,023 $ 142,538
Dividends or distributions to partners, 8,115 7,988 7,925 6,740 9,253
net
Capital expenditures, acquisitions
And investments (5) 448,522 478,464 1,034,026 859,047 979,603
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
==================================================================================================================
DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- ------------ ------------ ----------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (2) :
Current assets $ 2,805,080 $ 2,117,241 $ 2,018,780 $ 1,936,721 $ 762,939
Current liabilities 2,538,523 2,026,323 1,753,094 1,548,987 705,674
Property and equipment, net 2,017,881 1,932,107 1,521,576 1,691,379 948,511
Total assets 6,525,171 5,264,237 4,516,903 4,186,810 1,875,252
Long-term debt 1,333,926 1,046,890 1,002,054 988,597 522,764
Total equity 1,309,482 1,128,063 1,019,125 1,116,733 552,380
==================================================================================================================
</TABLE>
(1) The Destec Acquisition was accounted for as an acquisition of a business in
accordance with the purchase method of accounting and the results of
operations attributed to the acquired business are included in the
Company's financial statements and operating statistics effective July 1,
1997. The Chevron Combination was accounted for as an acquisition of assets
under the purchase method of accounting and the results of operations
attributed to the acquired assets are included in the Company's financial
statements and operating statistics effective September 1, 1996. The
Trident Combination was accounted for as an acquisition of a business in
accordance with the purchase method of accounting and the results of
operations attributed to the acquired business are included in the
Company's financial statements and operating statistics effective March 1,
1995.
(2) The Destec Acquisition and the Chevron and Trident Combinations were each
accounted for under the purchase method of accounting. Accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values as of the effective dates of each
transaction. The effective dates of the Destec Acquisition, Chevron
Combination and Trident Combination were June 30, 1997, September 1, 1996
and March 1, 1995, respectively.
(3) Earnings (loss) per share are computed in accordance with provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
for each of the years ended December 31, 1999, 1998, 1997, 1996 and 1995,
respectively. Pro forma earnings per share for the year ended December 31,
1995 is based on reported net income for the period adjusted for the
incremental statutory federal and state income taxes that would have been
provided had Clearinghouse been a taxpaying entity prior to the Trident
Combination. The pro forma earnings per share
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<PAGE> 32
computation for the year ended December 31, 1995, eliminates the effect of
a one-time $45.7 million income tax benefit associated with the Trident
Combination. The weighted average shares outstanding for the year ended
December 31, 1995, is based on the weighted average number of common shares
outstanding plus the common stock equivalents that would arise from the
exercise of outstanding options or warrants, when dilutive.
(4) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is presented as a measure of the Company's ability to service its debt and
to make capital expenditures. It is not a measure of operating results and
is not presented in the Consolidated Financial Statements. The 1997 amount
includes the non-cash portion of items associated with the $275 million
impairment and abandonment charge.
(5) Includes all value assigned the assets acquired in various business and
asset acquisitions. The 1997 amount is before reduction for value received
upon sale of Destec's foreign and non-strategic assets of approximately
$735 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
COMPANY PROFILE
Dynegy Inc. ("Dynegy" or the "Company") is a leading provider of energy
products and services in North America, the United Kingdom and in continental
Europe. Products marketed by the Company's wholesale marketing operations
include natural gas, electricity, coal, emissions, natural gas liquids, crude
oil, liquid petroleum gas and related services. The Company's wholesale
marketing operations are supported by ownership or control of an extensive asset
base and transportation network that includes unregulated power generation, gas
and liquids storage capacity, gas, power and liquids transportation capacity and
gas gathering, processing and fractionation assets. Dynegy's asset base is
further broadened by the acquisition of Illinova, providing significant
fossil-fuel merchant generation capacity and a regional electric and natural gas
utility engaged in the transmission, distribution and sale of electricity and
natural gas. The critical mass achieved through the combination of a large scale
energy marketing operation with strategically located assets which augment the
marketing efforts affords the Company the ability to offer innovative,
value-creating energy solutions to its customers.
The Company is a holding company that conducts substantially all of its
business through its subsidiaries. From inception of operations in 1984 until
1990, Clearinghouse limited its activities primarily to natural gas marketing.
Starting in 1990, Clearinghouse began expanding its core business operations
through acquisitions and strategic alliances resulting in the formation of a
midstream energy asset business and establishing energy marketing operations in
both Canada and the United Kingdom. The Company initiated electric power
marketing operations in February 1994 in order to exploit opportunities created
by the deregulation of the domestic electric power industry. Effective March 1,
1995, Clearinghouse and Holding merged and the combined entity was renamed NGC.
On August 31, 1996, NGC completed a strategic combination with Chevron U.S.A.
Inc. and certain Chevron affiliates whereby substantially all of Chevron's
midstream assets merged with NGC. Effective July 1, 1997, NGC acquired Destec.
During 1998, the Company changed its name to Dynegy Inc. in order to reflect its
evolution from a natural gas marketing company to an energy services company
capable of meeting the growing demands and diverse challenges of the dynamic
energy market of the 21st Century.
On June 14, 1999, Dynegy and Illinova announced the execution of
definitive agreements for the merger of Illinova and Dynegy. The merger
transaction was closed on February 1, 2000.
BUSINESS SEGMENTS
Dynegy's operations are reported herein in two segments: the Energy
Convergence and Midstream segments. In 2000, the Company will add a third
business segment consisting of regulated utility operations, operating under
Illinois Power Company, acquired in the Illinova acquisition. This segment will
be referred to as the Transmission and Distribution segment. The Energy
Convergence segment is actively engaged in value creation through marketing and
trading of natural gas, power, coal and emissions and the generation of
electricity principally under the name Dynegy Marketing and Trade. The Midstream
segment consists of the North American midstream liquids operations, the global
liquefied petroleum gas transportation and the natural gas liquids marketing
operations, located primarily in Houston and in London, and certain other
businesses. The North American midstream liquids operations are actively engaged
in the gathering and processing of natural gas and the transportation,
fractionation and storage of NGLs. The Midstream segment operates principally
under the name Dynegy Midstream Services.
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<PAGE> 33
ILLINOVA ACQUISITION
Dynegy completed its acquisition of Illinova early in the first quarter
2000. Illinova was an energy services holding company maintaining four principal
operating subsidiaries. These subsidiaries were:
o Illinois Power Company, an electric and natural gas utility engaged in the
transmission, distribution and sale of electricity and natural gas, serving
approximately 650,000 customers over a 15,000 square-mile area of Illinois;
o Illinova Power Marketing, Inc., a subsidiary engaged in the ownership and
operation of unregulated fossil-fueled electric generation in Illinois;
o Illinova Generating, Inc., a subsidiary that invests in, develops and
operates independent power projects worldwide; and
o Illinova Energy Partners, Inc., a subsidiary that markets energy and
energy-related services in the United States and Canada.
Illinois Power Company operations will continue as a regulated regional
utility. The operations of Illinois Power Marketing, Inc. and Illinova
Generating, Inc., respectively, are part of Dynegy's unregulated portfolio of
merchant generation capacity and related operations within Dynegy Marketing and
Trade, a division in the Energy Convergence segment. Illinova Energy Partners,
Inc. is part of Dynegy Energy Services, another division within the Energy
Convergence segment.
The merger of Dynegy and Illinova involved the creation of a new
holding company, now known as Dynegy Inc., and two separate but concurrent
mergers. In one concurrent merger, a wholly-owned subsidiary of Dynegy Inc.
merged with and into Illinova. In the other concurrent merger, a second
wholly-owned subsidiary of Dynegy Inc. merged with and into old Dynegy. As a
result of these two concurrent mergers, Illinova and old Dynegy continue to
exist as wholly-owned subsidiaries of Dynegy Inc., and are referred to as
Illinova Holding and Dynegy Holding, respectively. Dynegy accounted for the
merger as a purchase of Illinova. This accounting treatment is based on various
factors present in the merger, including the majority ownership (and voting
control) of Dynegy's shareholders following the merger, the role of Dynegy's
management following the merger (including the service of C.L. Watson as
Chairman and Chief Executive Officer) and the influence of Chevron because of
the size of its ownership interest and its rights under the shareholder
agreement, articles of incorporation and bylaws. As a result, the consolidated
financial statements of Dynegy after the merger will reflect the assets and
liabilities of Dynegy at historical book values and the assets and liabilities
of Illinova at fair values.
In the combination, Dynegy shareholders, other than Chevron U.S.A. Inc.
("Chevron"), NOVA Gas Services (U.S.) Inc. ("NOVA") and BG Holdings, Inc.,
elected to exchange each Dynegy share for 0.69 of a share of Dynegy Class A
common stock, based on a fixed exchange ratio, or elected to receive $16.50 per
share in cash consideration, subject to proration. NOVA and BG Holdings, Inc.
elected cash and thereby reduced their respective ownership in Dynegy as part of
this combination. Therefore, instead of receiving Dynegy Class A common stock in
exchange for their respective shares of Dynegy Holding common stock, NOVA and
the parent of BG Holdings, Inc. each received a combination of cash, subject to
proration, and shares of Dynegy Series A Convertible Preferred Stock. Chevron
received shares of Dynegy Class B common stock in exchange for all of its shares
of Dynegy Holding common stock and Series A Preferred Stock, respectively.
Additionally, as part of the combination, Chevron purchased $200 million of
additional Dynegy Class B common stock. Each share of Illinova common stock was
converted into one share of Dynegy Class A common stock. Immediately after the
combination, former Dynegy shareholders owned approximately 51 percent of the
outstanding shares of Dynegy.
Approximately 60 percent of the consideration received by existing
Dynegy shareholders was in the form of Dynegy stock and 40 percent was cash. In
aggregate, the cash portion of the consideration approximated $1.07 billion.
Dynegy financed the cash component of the merger initially with borrowings under
a debt facility and the issuance of $200 million of Class B common stock to
Chevron. Dynegy anticipates repaying or refinancing a significant portion of the
debt facility with proceeds from an offering of equity securities, additional
public debt issuances, proceeds from asset sales and cash flow from operations.
Dynegy believes the acquisition of Illinova provides significant
financial, operational and corporate governance advantages that enhance its
position as a leading provider of energy services and products. The combination
will bring together a strong, innovative utility company owning strategically
located generation assets
31
<PAGE> 34
and operations, including electric transmission and retail distribution
capabilities, with one of the leading North American energy marketers and
independent power producers. These two companies have diverse but complementary
operations, providing qualitative and quantitative expansion of Dynegy's
electric generation capacity, while enhancing Dynegy's access to dependable cash
flow and an improved platform for further expansion. It is expected that the
combined company will be well positioned to be successful in the increasingly
competitive energy marketplace. Dynegy expects the merger to enhance shareholder
value more than either company could do on its own.
Factors considered in evaluating the benefits of the merger included:
o The merger is expected to be accretive to the earnings per share of the
Dynegy shareholders;
o The addition of Illinova's traditional utility business is expected to
provide a stable base of cash flow from which the combined company will be
able to leverage its business strategy;
o The merger provides Dynegy with a larger platform in the electricity
trading market from which it can expand its marketing operations. This
larger platform is expected to provide the foundation for Dynegy's strategy
to be at the forefront of the restructuring of the power industry and the
convergence of the gas and electricity industries;
o The merger adds an additional 4,989 gross megawatts of electricity
generating capacity to Dynegy's post-merger capacity of 7,238 gross
megawatts per year (both figures include current capacity as well as
capacity under construction). This additional capacity is in the
Midwestern United States and is expected to allow Dynegy to sell more
electricity for its on account on better terms throughout the North
American market;
o The merger is expected to provide continuing shareholders, who desire to
invest in a full-service provider of energy products and services, an
investment vehicle having the flexibility and resources required to respond
to the numerous opportunities in the energy industry;
o The merger provides the liquidity needed to allow certain Dynegy
shareholders to reduce the size of their investment in Dynegy; and
o The merger improves public float thereby enhancing the Company's access to
equity capital at attractive cost.
ASSET DISPOSITIONS
During the fourth quarter of 1999 and in early 2000, the Company
disposed of certain assets and settled certain contractual arrangements
realizing approximately $795 million in aggregate net proceeds. These
transactions were entered into as a result of statutory requirements pursuant to
the acquisition of Illinova, for the purpose of eliminating operating assets
considered non-strategic or which were under-performing in comparison to other
assets in the portfolio and in some cases to diversify direct ownership in
certain generation assets while maintaining commercial control over such
investments. The net proceeds received in these transactions are being used to
retire merger-related debt or are being re-deployed into the Company's capital
investment program. The financial impact of these transactions in the aggregate
were not material to Dynegy's results of operations or financial position in
1999 and is not expected to be material to net income or financial position for
the year ended December 31, 2000. Further, disposition of these assets is not
expected to have a material adverse effect on Dynegy's prospective competitive
position in the businesses in which it operates. The transactions entered into
and the reasons for such are as follows:
o Qualified Facilities -
As a condition precedent to the Illinova acquisition, Dynegy sold its
interests in eleven qualifying cogeneration facilities to a third party
for approximately $256 million. The sale of these interests was dictated
by PURPA requirements imposed as a result of Dynegy's acquisition of a
regulated utility.
o Mid-Continent Liquids Assets -
Through two transactions, one in December 1999 and one in January 2000, the
company agreed to sell its Mid-Continent natural gas processing and
gathering facilities. The December sale has closed and the January sale is
set to close in March 2000. These facilities were non-strategic, were
under-performing in comparison to other assets in the portfolio and exposed
Dynegy to commodity price risk that was difficult to mitigate on a
consistent basis. As part of the December 1999 sale, Dynegy executed a
purchase and sale contract to acquire substantially all of the natural gas
liquids processed by certain of these natural gas
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<PAGE> 35
processing plants for a period of three years. The aggregate net proceeds
from these sales will approximate $422 million and the Company recognized
no material gain or loss on either transaction.
o Gasification Operations -
In two separate transactions, Dynegy settled a long-term sales contract and
sold the underlying technology and assets associated with its coal
gasification business in Indiana. Coal gasification technology was not
strategic to Dynegy's long-term goals. Aggregate net proceeds from these
transactions is proprietary information.
o Reduced Interest in Rocky Road Power Generation Facility -
Dynegy reduced its ownership interest in the Rocky Road power generation
facility, located in Illinois, from 100 percent to 50 percent in December
1999 pursuant to its stated plan to diversify ownership in these types of
assets in order to deploy as much capital as possible to this segment of
our operations. Dynegy continues to operate and market the energy from this
facility through agency relationships with the LLC. Aggregate net proceeds
from this transaction is proprietary information.
o Crude Business -
Dynegy's domestic crude oil marketing operations are held for sale.
Management expects to dispose of these assets during the first quarter
2000. The Company's Canadian crude oil marketing operations are unaffected
by this proposed disposition.
EXECUTION OF BUSINESS STRATEGY
Dynegy successfully executed key operating and business strategies
that management believes provide impetus for financial growth in 2000 and
beyond. Key accomplishments during the period, which are more fully described
elsewhere herein, included:
o Completion of the acquisition of Illinova;
o Expansion of ownership or control of power generating assets and
infrastructure;
o Expansion of operations in the United Kingdom and in Europe;
o Continued concentration on maximizing unit margins through selective
disposition of marginally profitable sales volumes;
o Expansion of a retail energy marketing strategy combining existing
alliances with businesses acquired in the Illinova acquisition;
o First quartile operating performance in the Company's natural gas liquids
businesses through formation of joint ventures, asset consolidations,
discrete asset dispositions, revenue enhancements and strategic cost
efficiency and reduction measures;
o Continued emphasis on "just-in-time" controlled inventory management
techniques and execution of risk management methods to reduce exposure to
swings in liquids commodity prices;
o Continued implementation of technology infrastructure improvements intended
to provide the Company with state-of-the-art business and financial
software applications; and
o Appropriate maintenance of the Company's capital structure.
ENERGY CONVERGENCE -
Dynegy is continuing its expansion of ownership or commercial control
of strategic assets and generating capacity in selected major market areas
through acquisitions, greenfield development and asset management agreements in
order to leverage its marketing and trading capabilities. Execution of this
strategy began with the acquisition of Destec in 1997 and has accelerated with
the acquisition of Illinova, the formation of a west coast generation venture
and the greenfield projects that have been completed or are under construction.
As discussed previously, the Company completed the acquisition of
Illinova in early 2000 adding 4,989 megawatts of merchant generation capacity,
strategically located in the mid-west, to its portfolio. In June 1999, the
Company completed construction and began commercial operations of a 250 megawatt
gas-fired merchant plant designed to assist in reducing power system congestion
induced by peak electricity demands in the mid-west. Dynegy owns a 50 percent
interest in this facility. In the second quarter of 1999, the Company completed
a
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<PAGE> 36
restructuring of ownership interests in generation capacity owned jointly with
an industry partner, through consolidation of four separate investments into a
single joint venture. These assets represent over 1,200 megawatts of generation
capacity located in southern California and the restructuring resulted in
favorable financing and operating synergies. During 1999, the Company announced
its intent to develop power generation projects in the following areas:
Rockingham County, North Carolina; Lake Charles, Louisiana; Heard County,
Georgia; Osceola County, Florida; Louisville, Kentucky; East Dundee, Illinois;
and Channelview, Texas. These facilities will add an additional 2,710 megawatts
of generation capacity to Dynegy's portfolio. The net additions to Dynegy's
portfolio were tempered somewhat by the aforementioned disposition of the
qualifying facilities. However, the sale of these assets, which did not consist
of merchant generation capacity, is not expected to be significant to the
Company's execution of its long-term strategy. Finally, consistent with our
stated strategy and as a result of the long lead time required by industry
manufacturers, the Company has executed or is currently negotiating purchase
orders to acquire in excess of forty state-of-the-art gas-fired turbines,
representing approximately 6,900 megawatts of capacity. Delivery of the
manufactured turbines will occur ratably beginning in 1999 and ending in 2003.
The timing of delivery of these turbines coincides with Dynegy's capital asset
program, which is linked to our goal of owning or controlling 70,000 megawatts
of generation capacity within five years.
During 1999, Dynegy continued its focus on higher margin business in
its gas and power marketing operations. The execution of this strategy was
enhanced by the marketing, trading and arbitrage opportunities provided by the
control and optimization of physical assets. Also in 1999, Dynegy expanded its
trading and marketing strategy by adding power marketing operations to its
existing gas marketing operations in the UK. This business is beginning to
expand into Europe beginning with trading operations in the Nord Pool and office
expansions in continental Europe.
The acquisition of Illinova brings together two diverse retail gas and
power marketing strategies that we believe complement each other. Dynegy will
continue to execute its retail gas and electric strategy, which is designed to
access a significant national customer base while mitigating the large capital
investment and financial risks necessitated by other national retail marketing
strategies. However, where commercial synergies exist, Dynegy will leverage off
the existing Illinova operations in order to maximize returns from its retail
strategy, without altering the overall risk profile of this business.
MIDSTREAM SEGMENT -
During 1999, the Midstream segment continued execution of the
restructuring and rationalization of its operations that were begun in 1997. The
segment's businesses were able to achieve first quartile operating performance
through efficiency improvements and cost reductions that enhanced its
competitive position in the marketplace. These businesses increased their focus
on extracting fee income throughout the value chain, unbundling services and
leveraging off the Company's commercial skills and relationships. In addition,
the segment businesses focused efforts on re-negotiating or restructuring
marginally profitable contractual arrangements in order to position these
businesses for profitable growth. Finally, the segment continued to invest in
strategically located midstream assets in order to advance existing commercial
advantages or to leverage off identified economies of scale, while divesting
itself of under-performing assets. The intent of these initiatives is to
mitigate the variability that commodity prices have on the operating results of
the segment, as well as to position the segment's businesses to take full
advantage of improvements in market conditions when they occur. For the
foreseeable future, Dynegy will focus its operations and capital expansion
towards infrastructure and opportunities present in the western Gulf of Mexico
area, stretching from Mont Belvieu, Texas to Mississippi, and in other areas
Management views as strategic.
Dynegy believes that existing owned infrastructure and commercial
acumen uniquely positions the Company to exploit opportunities in both the
domestic and world-wide liquids marketing and trading business. Dynegy will
continue to focus on reducing commodity volatility exposure, while maintaining
first quartile operating efficiency with an operational emphasis on downstream
marketing and trading.
TECHNOLOGY INFRASTRUCTURE ENHANCEMENTS -
Dynegy has continued its three-year plan, launched in 1998, to enhance
our competitiveness through technology infrastructure improvements aimed at
optimizing major business and financial processes at the Company. Using
state-of-the-art technology and software applications, the project team is
focused on process enhancements
34
<PAGE> 37
extending throughout the organization, linking initial price and market
discovery with risk control, production, aggregation, distribution, cash
settlement, accounting and financial statement recognition.
As an integral part of this three-year plan, management is defining and
executing an end-to-end eBusiness Strategy, having the intent of placing Dynegy
at the forefront of our industry as it relates to this technological
advancement. Dynegy believes that eCommerce is fast becoming the primary
business enabler in our industry resulting in a paradigm shift in how business
is conducted. Management believes that opportunities existing from application
of this technology are significant and that a successful execution of a
comprehensive strategy is paramount to maximizing our stated goals and
strategies.
CAPITAL MAINTENANCE -
During 1999 and into 2000, the Company managed its consolidated capital
structure providing capital for the acquisition of Illinova, the formation of
the West Coast Power generation joint venture under favorable terms and
providing capital for the execution of its aggressive capital investment
program. The Company was granted an investment grade credit rating following the
acquisition of Illinova with no diminution of previous ratings, despite an
increase in indebtedness required to execute the transaction. Dynegy anticipates
a sale of common equity in the first half of 2000 that, when combined with
proceeds from the sale of non-strategic assets, should provide a debt to capital
ratio consistent with historic norms.
IMPACT OF PRICE FLUCTUATIONS
Dynegy'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.
The Energy Convergence segment includes the integrated component
businesses: wholesale gas marketing, wholesale power marketing and power
generation. Operating margins earned by wholesale gas and power marketing,
exclusive of risk-management activities, are relatively insensitive to commodity
price fluctuations since most of the purchase and sales contracts do not contain
fixed-price provisions. Generally, prices contained in these contracts are tied
to a current spot or index price and, therefore, adjust directionally with
changes in overall market conditions. However, market price fluctuations for
natural gas and electricity can have a significant impact on the operating
margin derived from risk-management activities in these businesses. Dynegy
generally attempts to balance its fixed-price physical and financial purchase
and sales commitments in terms of contract volumes, and the timing of
performance and delivery obligations. To the extent a net open position exists,
fluctuating commodity market prices can impact Dynegy's financial position or
results of operations, either favorably or unfavorably. The net open positions
are actively managed, and the impact of changing prices on the Company's
financial condition at a point in time is not necessarily indicative of the
impact of price movements throughout the year. Historically, fuel costs,
principally natural gas, represented the primary variable cost impacting the
financial performance of the Company's investment in power generating
facilities. Operating margins at these facilities were relatively insensitive to
commodity price fluctuations since most purchase and sales contracts contained
variable power sales contract features tied to a current spot or index natural
gas price, allowing revenues to adjust directionally with changes in natural gas
prices. However, the Company's investment strategy, which emphasizes growth of
merchant generation capacity, is altering the makeup of its generation asset
portfolio. The growth of merchant generation capacity as a percentage of total
available capacity increases the Company's exposure to commodity price risk. The
financial performance and cash flow derived from merchant generation capacity is
impacted, either favorably or unfavorably, by changes in and the relationship
between natural gas and electricity prices. The Company actively manages the
price risks described above and may, at times, have a bias in the market, within
established guidelines, resulting from management of its portfolio.
Operating margins associated with the Midstream segment's natural gas
gathering, processing and fractionation activities are very sensitive to changes
in natural gas liquids prices and the availability of inlet
35
<PAGE> 38
volumes. The impact from changes in natural gas liquids prices results
principally from the nature of contractual terms under which natural gas is
processed and products are sold. In addition, certain of the Midstream
businesses' processing plant assets are impacted by changes in, and the
relationship between, natural gas and natural gas liquids prices which, in turn
influences the volumes of gas processed. Commodity price fluctuations may also
affect the operating margins derived from the Company's natural gas liquid
marketing business. Based upon current levels of natural gas processing
activities and industry fundamentals, the estimated impact on annual operating
margins of each one-cent movement in the annual average price of natural gas
liquids approximates $6 to $8 million. The availability of inlet volumes
directly affects the utilization and profitability of the segment's businesses
throughout the Liquids Value Chain. The acquisition of inlet volumes is highly
competitive and the availability of such volumes to industry-wide participants
is also impacted by price variability. Unilateral decisions made by producers to
shut-in production or otherwise curtail workovers, reduce well maintenance
activities and/or delay or cancel drilling activities, as a result of depressed
commodity prices or other factors, negatively affects production available to
the entire midstream industry. Because such decisions are based upon the pricing
environment at any particular time, management cannot predict with precision the
impact that such decisions may have on its business.
OPERATIONS RISK
Dynegy's stated business strategy is to expand ownership or control of
merchant generation capacity in select markets across the country. As Dynegy
moves forward with the execution of its strategic plan to own or control 70,000
megawatts of capacity within five years, risk of earnings volatility increases
through exposure to unanticipated variability in generation capacity
dependability factors. The increasing importance of and dependency upon physical
generation of electricity as a percentage of Dynegy's overall portfolio and
strategy may substantially alter Dynegy's earnings risk profile over time. Many
of the implied risks associated with ownership and control of generation
capacity may not be fully mitigated through application of risk management
methods and/or state-of-the-art, first quartile power generation operating
methods.
The addition of generation assets to Dynegy's portfolio may increase
enterprise exposure to environmental and regulatory laws and regulations. These
exposures could result in increased expenditures for capital improvements to
meet certain statutory requirements and could result in expenditures for
remediation of unanticipated environmental contamination. The potential
redirection of capital to these types of expenditures could reduce the level of
available discretionary capital currently anticipated to be used in executing
Dynegy's strategic plan in future periods.
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. However,
as a result of the industry-wide emphasis on the growth of gas-fired generation,
historical seasonality associated with natural gas sales volumes and prices may
become less pronounced in the future. Conversely, power marketing operations are
typically impacted by higher demand and commodity price volatility during the
summer cooling season. Consistent with power marketing, the Company's
electricity generating facilities generally experience peak demand during the
summer cooling season, particularly for merchant plant generating facilities.
Partly as a result of Dynegy's emphasis on merchant power generation, revenue
and operating margin may vary, either positively or negatively, as weather
driven demand varies from historic norms. The Midstream Businesses are also
subject to seasonal factors; however, such factors typically have a greater
impact on sales prices than on sales volumes. Natural gas liquids prices
typically increase during the winter season due to greater heating requirements.
The Company's wholesale propane business is seasonally weighted in terms of
volume and price, consistent with the trend in the Company's natural gas
operations, as a result of greater demand for crop-drying and space-heating
requirements in the fall and winter months.
EFFECT OF INFLATION
Although Dynegy'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.
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<PAGE> 39
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, 1999, approximately $456 million of
commercial paper was outstanding and $40 million was outstanding under existing
money market lines of credit.
CORPORATE CREDIT AGREEMENTS
Dynegy'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 2000. Both agreements provide
funding for working capital, letters of credit and other general corporate
expenditures. At December 31, 1999, letters of credit and borrowings under the
corporate credit agreements aggregated $36 million and, after consideration of
the outstanding commercial paper, aggregate unused borrowing capacity under the
corporate credit agreements approximated $267 million.
CANADIAN CREDIT FACILITY
In November 1998, an indirect wholly-owned Canadian subsidiary of the
Company entered into a $60 million, two-year revolving credit facility maturing
in November 2000. Borrowings under this agreement may be used for general
corporate purposes. At December 31, 1999, $40 million was outstanding under this
agreement.
PUBLIC DEBT
The Company has five separate public debt issues aggregating $900
million, which mature in 2002, 2005, 2006, 2018 and 2026, respectively. Net
proceeds derived from these issues were used to reduce outstanding borrowings
under credit arrangements existing at the date of each respective issuance.
NON-RECOURSE DEBT
The consolidated debt balance includes three notes aggregating
$89 million. These notes have recourse only to the assets of identified power
generation projects. Each of the three notes represents a fifteen-year term loan
obligation payable in semi-annual installments of principal plus accrued
interest. These notes are related to the Qualifying Facilities that were sold in
February, 2000.
PREFERRED SECURITIES OF SUBSIDIARY TRUST
NGC Corporation Capital Trust I ("Trust"), a wholly owned subsidiary of
Dynegy, 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
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<PAGE> 40
Debentures. Following the issuance of the Securities, the Trust completed an
exchange offer through which all of the outstanding Securities were exchanged by
the holders thereof for registered securities having substantially the same
rights and obligations.
OTHER MATTERS
STOCKHOLDER ISSUES. Effective with the execution of the acquisition of
Illinova, BG and NOVA each reduced their stakes in Dynegy to below 5 percent by
accepting $16.50 cash per share for a significant portion of their previous
aggregate common stock ownership in Dynegy Holding. Further, Dynegy granted both
BG and NOVA registration rights for shares of Series A Convertible Preferred
Stock and shares of Class A common stock issued or issuable upon conversion of
the Series A Convertible Preferred Stock held by each following execution of the
merger. Finally, BG and NOVA were granted rights to obligate Dynegy to initiate
a registered public offering for all shares requested to be sold by BG and NOVA,
subject to certain conditions precedent.
Pursuant to the terms of the merger agreement, Chevron maintained a 28
percent equity stake in Dynegy. Further, in accordance with a shareholder
agreement, Chevron was granted certain rights pursuant to its ownership of all
of the Class B common shares of Dynegy.
ACQUISITION AND CONSTRUCTION PROJECTS. Included in the 2000 budget is
$873 million committed to construction projects in progress, identified asset
acquisitions, maintenance capital projects, environmental projects, technology
infrastructure and software enhancements, contributions to equity investments
and certain discretionary capital investment funds. The capital budget is
subject to revision as unforeseen opportunities or circumstances arise. Funds
committed to the various segments in 2000 are as follows:
<TABLE>
<CAPTION>
===================================================================================================
CAPITAL BUDGET FOR 2000 ACQUISITION AND CONSTRUCTION PROJECTS
===================================================================================================
ESTIMATED
CAPITAL
SEGMENT SPENDING
-------------------------------------------------------------- ------------------
($ IN THOUSANDS)
<S> <C>
Energy Convergence:
Power Generation $ 450,000
Marketing and Trade 50,000
Illinois Power 178,000
Midstream Segment 110,000
Information Technology Infrastructure and Software and 85,000
--------------
Other
$ 873,000
==============
===================================================================================================
</TABLE>
COMMITMENTS. In conducting its operations, the Company routinely enters
into agreements that commit future cash flow to the lease and or acquisition of
assets used in its businesses. These commitments are typically associated with
capital projects, reservation charges for storage and transportation capacity,
office and equipment leases and other similar items. The terms of these
agreements vary based on the nature and intent of each transaction. The
following describes the more significant commitments outstanding at December 31,
1999.
The Company is engaged in a continuous capital asset expansion program
consistent with its business plan and energy convergence strategies. The
emphasis of this capital asset program is on the acquisition or construction of
strategically located power generation assets. Consistent with this strategy and
as a result of the long lead time required by industry manufacturers, a
subsidiary of the Company has executed or is currently negotiating purchase
orders to acquire in excess of forty state-of-the-art gas-fired turbines
representing approximately 6,900 megawatts of generating capacity. These
purchase orders represent a capital commitment of approximately $1.3 billion.
Delivery of the manufactured turbines will occur ratably through 2003.
Commitments under these purchase orders are generally payable consistent with
the delivery schedule. The purchase orders include milestone requirements by the
manufacturer and provide Dynegy with the ability to cancel each discrete
purchase order commitment in exchange for a fee, which escalates over time. The
capital asset program is subject to periodic review and revision, and the actual
number of
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<PAGE> 41
projects and aggregate cost for such projects will be dependent on various
factors including available capital resources, market conditions, legislative
actions, load growth, changes in materials, supplies and labor costs and the
identification of partners in order to spread investment risk.
The Company routinely enters into supply and market contracts for the
purchase and sale of electricity, some of which contain fixed capacity payments.
Obligations under these supply contracts, which are not already fair valued on
the balance sheet at December 31, 1999, totaled $212 million on a discounted
basis. Such obligations are generally payable on a ratable basis, the term of
which extends through 2011. In return for such fixed capacity payments, Dynegy
receives volumes of electricity at agreed prices, which it then may re-market.
Based on year-end estimates, the market value of electricity available for sale
under these contracts exceeds the cost of such electricity, which amount
includes the fixed capacity payments disclosed herein.
In October 1999, the Company announced that it had achieved all of the
necessary approvals to begin construction on its Heard County Power Project, a
500-megawatt natural gas-fired, simple-cycle peaking facility located in
Franklin in Heard County, Georgia. A Dynegy subsidiary will design and construct
the generating facility, as agent for a third party, and Dynegy is obligated to
guarantee approximately 90 percent of the actual cost of the project during the
construction phase. It is anticipated that Dynegy will subsequently lease the
completed facility from that third party for an initial term of five years.
Under certain circumstances, the Company maintains an option to purchase the
facility from the third party and it may participate in the outright sale of the
asset.
A wholly owned subsidiary of the Company leases a power generating
asset under an agreement that is classified as an operating lease. This
agreement has aggregate future minimum lease payments of approximately $7.1
million at December 31, 1999.
DIVIDEND REQUIREMENTS. In 2000, Dynegy's Class A and Class B common
stock will be entitled to a $0.60 per share dividend if, when and as declared by
the Board of Directors of the Company out of funds legally available therefor.
The Class B common stock has certain conversion features and maintains certain
preemptive rights under the shareholder agreement. The holders of the Series A
Convertible Preferred Stock are entitled to receive dividends or distributions
totaling $3.00 per share annually if and when declared by the Board of Directors
of the Company out of funds legally available therefor. Dividends on the
preferred shares are cumulative from the date of issuance and are payable
quarterly on the last day of March, June, September and December. The preferred
stock carry certain priority, liquidation, redemption, conversion and voting
rights not available to the common shareholders.
STOCK REPURCHASE PLAN. 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 (1.1 million shares on an
adjusted basis pursuant to the Illinova acquisition) in open market
transactions. At December 31, 1999, approximately 399,000 shares (276,000 shares
on an adjusted basis pursuant to the Illinova acquisition) remained available
for repurchase under this program.
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES. The Company is
exposed to certain market risks inherent in the Company's financial instruments,
which arise from transactions entered into in the normal course of business. The
Company routinely enters into financial instrument contracts to hedge purchase
and sale commitments, fuel requirements and inventories in its natural gas,
natural gas liquids, crude oil, electricity and coal businesses in order to
minimize the risk of market fluctuations. Dynegy 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:
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<PAGE> 42
<TABLE>
<CAPTION>
============================================================================================================
ABSOLUTE NOTIONAL CONTRACT AMOUNTS
============================================================================================================
DECEMBER 31,
-----------------------------------------------
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Natural Gas (Trillion Cubic Feet) 5.702 4.179 2.558
Electricity (Million Megawatt Hours) 42.949 1.835 2.244
Natural Gas Liquids (Million Barrels) 19.902 6.397 4.355
Crude Oil (Million Barrels) 35.554 18.800 14.920
Interest Rate Swaps (in thousands of US Dollars) $ 36,524 $ 69,332 $ 180,000
Fixed Interest Rate Paid on Swaps (Percent) 8.210 8.067 6.603
U.K. Pound Sterling (in thousands of US Dollars) $ 85,812 $ 69,254 $ 74,638
Average U.K. Pound Sterling Contract Rate (in US Dollars) $ 1.6191 $ 1.6143 $ 1.5948
Canadian Dollar (in thousands of US Dollars) $ 288,898 $ 268,307 $ 37,041
Average Canadian Dollar Contract Rate (in US Dollars) $ 0.6775 $ 0.6710 $ 0.7240
============================================================================================================
</TABLE>
Cash-flow requirements for these commodity risk-management, interest
rate and foreign exchange contracts were estimated based upon market prices in
effect at December 31, 1999. Cash-flow requirements were as follows:
<TABLE>
<CAPTION>
======================================================================================================================
CASH FLOW REQUIREMENTS FOR RISK MANAGEMENT CONTRACTS
======================================================================================================================
2000 2001 2002 2003 2004 BEYOND
----------- ----------- ----------- ------------ ------------ ------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Future estimated net inflows
(outflows) based on year
end market prices/rates $ 33,893 $ 13,735 $ 13,958 $ 13,711 $ 12,447 $ 6,446
=========== =========== =========== ============ ============ ============
======================================================================================================================
</TABLE>
Dynegy measures entity-wide market risk in its financial trading and
risk-management portfolios using value at risk. The quantification of market
risk using value at risk provides a consistent measure of risk across diverse
energy markets and products with different risk factors in order to set the
overall corporate risk tolerance, to determine risk targets, and to set position
limits. The use of this methodology requires a number of key assumptions
including the selection of a confidence level and the holding period to
liquidation. Dynegy relies on value at risk to determine the maximum potential
reduction in the trading portfolio value allowed within a given probability over
a defined period. Because of limitations to value at risk, Dynegy uses other
means to monitor market risk in the trading portfolios. In addition to value at
risk, Dynegy performs regular stress and scenario analysis to measure extreme
losses due to exceptional events. The value at risk and stress testing results
are reviewed to determine the maximum allowable reduction in the total equity of
the commodity portfolios. Additional measures are used to determine the
treatment of risks outside the value at risk methodologies, such as market
volatility, liquidity, event and correlation risk. Dynegy estimates value at
risk using a JP Morgan RiskMetrics TM approach assuming a one-day holding period
and a 95 percent confidence level. At December 31, 1999, the value at risk for
Dynegy's trading and risk-management portfolios approximated $5.8 million and
the average of such value during the year ended December 31, 1999 was estimated
at $4.8 million.
ACCOUNTING PRONOUNCEMENTS. Effective January 1, 1999, the Company adopted the
provisions of Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy
Trading and Risk Management Activities" ("EITF 98-10") pursuant to the
implementation requirements stated therein. The resulting effect of adoption of
the provisions of EITF 98-10 was to alter the Company's comprehensive method of
accounting for energy-related contracts, as defined in that statement. The
cumulative effect of this change in accounting principle was not material to the
1999 results of operations. The pro forma effect on prior periods of the
adoption of the provisions of EITF 98-10 was not determinable.
Previously, only North American fixed-price natural gas transactions
were measured at fair value, net of future servicing costs and reserves as
estimated by the Company. The Company now accounts for all energy trading
activities at fair value as of each balance sheet date and recognizes currently
the net gains or losses resulting from the revaluation of these contracts to
market in its results of operations. As a result, substantially all of the
operations of the Company's world-wide gas marketing, power marketing, and crude
marketing operations are now accounted for under a mark-to-market accounting
methodology. Generally, revenue recognition for the Company's natural gas
liquids
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<PAGE> 43
processing, fractionation, transportation and marketing activities, as well as
its power generation businesses, remain on an accrual-based accounting
methodology. Sales and purchases by these businesses are not trading operations,
as defined in the statement, and therefore not subject to the provisions of EITF
98-10.
The Company continues to analyze the effects of adoption of the rules
promulgated by Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("Statement No. 133").
Provisions in Statement No. 133 will affect the accounting and disclosure of
contractual arrangements and operations of the Company. The Financial Accounting
Standards Board recently deferred implementation of the provisions of Statement
No. 133 to fiscal periods beginning after June 15, 2000. Dynegy intends to adopt
the provisions of Statement No. 133 within the timeframe and in accordance with
the requirements provided by that statement. Management is currently assessing
the financial statement impact; however, such impact is not determinable at this
time.
Management believes the adoption of the provisions of EITF 98-10 and
Statement No. 133 may affect the variability of future periodic results reported
by Dynegy, as well as its competitors, as market conditions and resulting
trading portfolio valuations change from time to time. Such earnings
variability, if any, will likely result principally from valuation issues
arising from imbalances between supply and demand created by illiquidity in
certain commodity markets resulting from, among other things, a lack of mature
trading and price discovery mechanisms, transmission and/or transportation
constraints resulting from regulation or other issues in certain markets and the
need for a representative number of market participants maintaining the
financial liquidity and other resources necessary to compete effectively.
YEAR 2000 ISSUES. Dynegy completed all phases of the Year 2000 Program
relative to computer systems and technology infrastructure considered essential
to the Company's business prior to the event. The year 2000 event passed without
significant incident. Dynegy's contingency plans are designed to minimize any
disruptions or other adverse effects resulting from unexpected incompatibilities
regarding core systems and business applications and to facilitate the early
identification and remediation of system problems that manifest themselves after
December 31, 1999. To date, no significant items have been identified. Dynegy
continues to assess, test and remediate business applications and technology
infrastructure that were previously determined to be other than essential to
core business operations. The extent of these activities is very insignificant
to Dynegy's overall business.
Aggregate costs expended for the Year 2000 Project totaled $6 million.
Approximately $2 million of this amount was expended during 1998 with an
additional $4 million expended in 1999.
ENVIRONMENTAL MATTERS. Dynegy'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 $4 million
in 1999. The addition of fossil fuel-fired electric generation to Dynegy's
portfolio, acquired in the Illinova acquisition, increases Dynegy's exposure to
environmental regulation, as well as anticipated increased expenditures for
remediation requirements and capital costs associated with Clean Air Act
requirements and other federal and state legislation. Many of these exposures
represent risks that Dynegy heretofore has not otherwise been subjected to.
Management is confident that it has the resources in place to effectively manage
the anticipated issues imposed by this heightened regulation and the financial
liquidity to address anticipated expenditures associated with adherence to such
regulation. Total environmental expenditures for both capital and operating
maintenance and administrative costs are not expected to exceed $75 million in
2000 inclusive of the assets purchased in the Illinova acquisition.
41
<PAGE> 44
CONCLUSION
The Company continues to believe that it will be able to meet all
foreseeable cash requirements, including expenditures associated with the
Illinova acquisition, working capital, capital expenditures and debt service,
from operating cash flow, supplemented by borrowings under its various credit
facilities, if required.
42
<PAGE> 45
RESULTS OF OPERATIONS
The following table reflects certain operating and financial data for
the Company's business segments for the years ended December 31, 1999, 1998 and
1997, respectively.
<TABLE>
<CAPTION>
=================================================================================================================================
DYNEGY'S OPERATING AND FINANCIAL DATA
=================================================================================================================================
ENERGY CONVERGENCE MIDSTREAM
----------------------------------------- ------------------------------------------
1999 1998 1997 1999 1998 1997
----------- ------------- ----------- ------------- ------------ ------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Power Marketing and Generation $ 178,241 $ 106,216 $ 23,513 $ --- $ --- $ ---
Natural Gas Marketing 105,353 130,059 103,292 --- --- ---
Upstream Operations --- --- --- 122,844 91,472 206,564
Downstream Operations --- --- --- 123,870 91,802 51,425
Crude Oil Operations --- --- --- 13,567 9,138 500
Equity Investments 62,185 75,242 36,241 17,669 15,796 22,718
----------- ------------- ----------- ------------- ------------ ------------
SUBTOTAL - FINANCIAL CONTRIBUTION (1) 345,779 311,517 163,046 277,950 208,208 281,207
Depreciation 35,116 29,026 16,425 94,342 84,176 87,966
General and Administrative 128,260 110,543 76,184 72,457 75,165 73,160
Impairment, Abandonment and Other --- 2,723 20,228 --- 6,921 254,772
Other Items 26,068 4,181 (2,770) 1,700 34,963 10,653
----------- ------------- ----------- ------------- ------------ ------------
EARNINGS BEFORE INTEREST AND $ 208,471 $ 173,406 $ 47,439 $ 112,851 $ 76,909 $ (124,038)
=========== ============= =========== ============= ============ ============
TAXES (2)
NORMALIZED EBIT (3) $ 199,602 $ 176,129 $ 67,667 $ 112,851 $ 57,509 $ 130,734
=========== ============= =========== ============= ============ ============
OPERATING STATISTICS:
Natural Gas Marketing (4) -
US Sales Volumes 6.5 5.9 6.1 --- --- ---
Canadian Sales Volumes 2.3 2.3 1.9 --- --- ---
UK Sales Volumes 1.1 0.7 0.2 --- --- ---
----------- ------------- ----------- ------------- ------------ ------------
9.9 8.9 8.2 --- --- ---
=========== ============= =========== ============= ============ ============
Power Marketing (5) 66.5 120.8 94.7 --- --- ---
Power Generation (6) -
Gross 21.5 15.9 7.2 --- --- ---
Net 12.8 9.8 4.3 --- --- ---
NGLs Processed (7) -
Field Plants --- --- --- 85.9 91.8 89.8
Straddle Plants --- --- --- 36.6 30.9 46.4
----------- ------------- ----------- ------------- ------------ ------------
--- --- --- 122.5 122.7 136.2
=========== ============= =========== ============= ============ ============
NGL Gathering and Transmission (4) --- --- --- 0.2 0.3 0.4
Barrels Received for Fractionation (8) --- --- --- 210.9 192.5 201.3
NGL Marketing (8) --- --- --- 449.9 410.7 413.9
LPG Sales (8) --- --- --- 87.2 72.9 91.8
Crude Oil Marketing (8) --- --- --- 206.8 239.6 168.3
</TABLE>
- ------------------------------------------
(1) Financial Contribution is the sum of the segment's operating margin and
equity earnings from unconsolidated affiliates.
(2) Earnings Before Interest and Taxes ("EBIT"), equals pretax earnings before
deduction of interest expense.
(3) Normalized EBIT adjusts EBIT for identified non-recurring items described
in the following narrative on three-year results.
(4) Billion Cubic Feet Per Day
(5) Million Megawatt Hours
(6) Million Megawatt Hours Generated
(7) Thousand Barrels Per Day - Gross
(8) Thousand Barrels Per Day
43
<PAGE> 46
THREE YEARS ENDED DECEMBER 31, 1999
For the year ended December 31, 1999, the Company realized net income
of $151.8 million, or $0.91 per diluted share. This compares with $108.4
million, or $0.66 per diluted share and a net loss of $102.5 million, or $0.68
per share in 1998 and 1997, respectively. The comparability of results period to
period was impaired by the recognition of net non-recurring, after-tax gains
totaling $5.8 million during 1999, after tax gains totaling $10.8 million during
1998, and net after-tax charges totaling $218.5 million recognized in 1997. In
addition, the comparability of results for the three years is influenced by the
Destec Acquisition that was effective July 1, 1997. Revenues in each of the
three years in the period ended December 31, 1999, totaled $15.4 billion, $14.3
billion, and $13.4 billion, respectively. Operating cash flows totaled $8.8
million for the year ended December 31, 1999, compared with operating cash
inflows of $250.8 million in 1998 and $278.6 million in 1997.
Non-recurring items in the current period relate to a $5.8 million
after-tax gain on the sale of an investment. In 1998 non-recurring items
included a $17.1 million after-tax gain on the sale of Ozark offset by a $6.3
million after-tax severance charge. The 1997 loss included one-time charges
principally associated with the abandonment and impairment of certain operating
and non-operating assets, inventory obsolescence and lower-of-cost-or-market
writedowns, reserves for contingencies and other obligations, a charge for a
hedging related loss and a charge associated with a change in the method of
accounting for certain business process re-engineering and information
technology transformation costs.
After consideration of the non-recurring items described above,
Dynegy's normalized net income for the year ended December 31, 1999,
approximated $146.0 million, or $0.87 per diluted share, compared with
normalized net income of $97.5 million, or $0.59 per diluted share in 1998, and
$108.7 million, or $0.65 per diluted share, in 1997. The lower normalized
results in 1998 as compared with the other two years generally reflect a
material increase in earnings derived from the Company's Energy Convergence
segment offset by the significant negative impact that crude and NGL commodity
prices had on the Midstream segment in 1998, as well as a trend towards higher
overhead, depreciation and interest costs during the three-year period.
Consolidated operating margin for each of the three years in the period
ended December 31, 1999, totaled $543.9 million, $428.7 million and $385.3
million, respectively. For the year ended December 31, 1999, the Company
reported operating income of $213.7 million, compared with operating income of
$120.1 million and an operating loss of $143.4 million for the 1998 and 1997
periods, respectively. Operating income in both the 1998 and 1997 periods was
negatively impacted by the pre-tax effect of portions of the aforementioned
non-recurring items. The increase in depreciation and amortization expense
during the three-year period reflects the depreciable assets acquired in the
Chevron Combination and the Destec Acquisition as well as the continued
expansion of the Company's depreciable asset base through other asset
acquisitions and capital projects completed during the three-year period.
Depreciation and amortization expense in the 1999 and 1998 periods benefited
from the prospective effect of the asset impairments and abandonments recognized
in 1997. The increased level of general and administrative expenses
period-to-period principally reflects the incremental costs associated with a
larger, more diverse base of operations, non-capitalizable consulting and other
costs required to support technology infrastructure improvements, higher
variable compensation costs in 1999 than in 1998 or 1997 and, to a lesser
degree, expenses related to identifying and resolving Year 2000 issues.
During the three-year period ended December 31, 1999, the Company
significantly increased its investment in unconsolidated affiliates, principally
as a result of the ownership interests and legal structures employed in a
majority of the investments made by the Energy Convergence segment. As a result,
the financial results of 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 $79.9 million to 1999 pre-tax
results, compared to $91.0 million in 1998 and $59.0 million in 1997. Equity
earnings in 1999 were lower than in 1998 principally in the generation
investment equity earnings group reflecting weather driven demand differences
between periods and higher interest costs in 1999 associated with the formation
of a new partnership. Cash distributions received from these investments during
each of the three years in the period ended December 31, 1999 approximated $66
million, $85 million and $55 million, respectively. The following table provides
a summary of equity earnings by investment for the comparable periods:
44
<PAGE> 47
<TABLE>
<CAPTION>
============================================================================================
DYNEGY'S EQUITY EARNINGS FROM UNCONSOLIDATED AFFILIATES
============================================================================================
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C>
Accord Energy Limited (1) $ 21,009 $ 21,822 $ 25,885
Other Gas Marketing Investments, Including NCL (1) (5,980) (3,469) (2,942)
Electric Power Marketing Investments 659 509 518
Power Generation Investments 46,497 56,380 12,780
Gulf Coast Fractionators 3,534 3,741 6,624
West Texas LPG Pipeline Limited Partnership 5,066 6,428 7,162
Venice Energy Services Company, L.L.C. 6,812 4,310 8,052
Other Midstream Businesses Investments, net 2,257 1,317 880
---------- ---------- ---------
$ 79,854 $ 91,038 $ 58,959
========== ========== =========
============================================================================================
</TABLE>
1. For a discussion of the Accord and NCL restructurings, refer to Note
11 of the Consolidated Financial Statements.
Interest expense totaled $78.2 million for the year ended December 31,
1999, compared with $75.0 million and $63.5 million for the comparable 1998 and
1997 periods. The higher interest expense period to period is attributed to
higher average outstanding principal amounts resulting primarily from debt
assumed in and resulting from the Company's capital expenditure program, the
Chevron Combination and the Destec Acquisition partially offset by interest
rates that trended lower over the three-year period.
Other income and expenses, net benefited operating results in each of
the years ended 1999 by $27.8 million, $39.1 million and $7.9 million,
respectively. In addition to the pretax effect of the previously mentioned
non-recurring gain on sale of an investment, 1999's other income and expense,
net included a $38 million pretax gain associated with the sale of an asset and
a $23 million pretax reserve associated with the realization of certain assets.
As a result, 1999 other income and expense, net benefited by approximately $15
million as a result of these items. Also, included in 1999's pretax earnings
was a $15 million pretax reserve for under-realization on a long-term generation
sales contract. Such amount was classified in operating margin. The effect of
these three items on net income was immaterial in the period, and to the segment
disclosures since all three items relate to Energy Convergence operations.
Therefore, the items were not highlighted as non-recurring items in previous
discussions on annual results. Each of the net amounts in 1998 and 1997 result
principally from the pretax effect of certain of the aforementioned
non-recurring items recognized in each period as well as numerous other less
significant recurring and non-recurring income and expense items.
During the second quarter of 1997, the Company sold $200 million
aggregate liquidation amount of 8.316% Subordinated Capital Income Securities.
Accumulated distributions associated with these Securities totaled $16.6 million
for each of the years ended December 31, 1999 and 1998 and $9.8 million for the
year ended December 31, 1997, respectively.
The Company reported an income tax provision of $74.7 million in 1999,
compared to an income tax provision of $50.3 million in 1998 and an income tax
benefit of $62.2 million in 1997, reflecting effective rates of 33 percent, 32
percent and (41) percent, respectively. In general, differences between the
aforementioned effective rates and the statutory rate of 35 percent result
primarily from permanent differences attributable to amortization of certain
intangibles, permanent differences arising from the effect of certain foreign
equity investments and state income taxes.
ENERGY CONVERGENCE -
The Energy Convergence segment had earnings before interest and taxes
("EBIT") of $208.5 million for the year ended December 31, 1999, compared to
$173.4 million in 1998, and $47.4 million in 1997. Normalized EBIT for each of
the three years in the period ended December 31, 1999, totaled $199.6 million,
$176.1 million and $67.7 million, respectively. These results were influenced,
either positively or negatively, by:
o lower demand for electricity in 1999 than in 1998, particularly in the
southern California market,
o favorable market movements in the United Kingdom in 1999 combined with
significant growth in operations in the UK over the three year period,
45
<PAGE> 48
o expansion of power trading to the UK and Europe in 1999,
o increased gas and power marketing origination in 1999,
o less price volatility in the North American power markets in 1999 and 1997
as compared to 1998, which reduced trading opportunities,
o significant mild weather in 1999 and 1998 as compared with historical
norms,
o advertising costs by our retail alliances,
o increased depreciation and general and administrative expenses reflecting
the capital and overhead costs required to support the larger, more diverse
base of operations, partially offset by
o the acquisition of Destec and its power generation platform in 1997.
Worldwide gas marketing operations were negatively influenced in all
periods by unseasonably warm weather in the winter months that eliminated any
significant volatility in commodity prices during those periods. Worldwide sales
volumes totaled 9.9 Bcf/d in 1999, 8.9 Bcf/d in 1998 and 8.2 Bcf/d in 1997.
Worldwide per-unit margins were $0.029, $0.040 and $0.035 for each of three
years in the period ended December 31, 1999, respectively.
The dramatic growth in financial contribution from the power marketing
business in 1999 is attributable to favorable price movements in the United
Kingdom and increased origination in the U. S. markets despite the lack of
weather-driven volatility and trading opportunities during the year. This is in
contrast to the financial contribution in 1998. Value extraction in that period
was derived from the extreme market volatility experienced in certain U.S.
markets, particularly in the mid-west, during the 1998 summer.
Results in power generation reflect the execution of the Company's
growth strategy over the three-year period. During this timeframe, gross
generation production grew 14.3 million megawatt hours or nearly 200 percent.
MIDSTREAM -
The Midstream segment had earnings before interest and taxes ("EBIT")
of $112.9 million for the year ended December 31, 1999, compared to $76.9
million in 1998, and a loss of $(124.0) million in 1997. Normalized EBIT for
each of the three years in the period ended December 31, 1999, totaled $112.9
million, $57.5 million and $130.7 million, respectively. Improved natural gas
liquids and crude oil prices, supplemented by targeted cost reductions and
revenue enhancements favorably impacted this segment's results period-to-period.
Sustained market price improvements in 1999 have resulted in increased gas
processing, fractionation and trading opportunities. In addition, world demand
for natural gas liquids strengthened in 1999, particularly in Europe and Asia
enhancing revenues from global marketing operations. Forward sales of equity
liquids production prevented this segment from fully realizing value during the
upturn in commodity prices during 1999. This hedging technique has also been
employed in 2000, resulting in the hedging of approximately 50 percent of 2000
equity production at a price above the historical ten-year mean propane price.
Average NGL market prices averaged $0.34 per gallon in 1999 compared to $0.25
per gallon in 1998 and $0.34 per gallon in 1997. Likewise, crude oil prices
improved during the year averaging $17.10 per barrel in 1999, $11.97 per barrel
in 1998 and $18.64 per barrel in 1997. During 1998, the decline in NGL and crude
oil commodity prices negatively impacted operations. During 1997, operating
margins from these businesses were negatively impacted by high-cost inventory
purchased during the fourth quarter of 1996, which was recognized in operating
results during the first quarter of 1997, culminating in a
lower-of-cost-or-market writedown of $12.3 million at March 31, 1997.
Additionally, included in the 1997 period are pre-tax charges related to a
lower-of-cost-or-market writedown of crude oil inventory of $2.7 million and a
hedge-related loss of $8.3 million.
Operationally, this segment's businesses continue to reflect a
leadership position in significantly all domestic midstream businesses.
Aggregate domestic natural gas liquids processing volumes totaled 122.5 thousand
gross barrels per day in 1999 compared to an average 122.7 thousand gross
barrels per day during 1998 and 136.2 thousand gross barrels per day in 1997.
Volumes for 1999 and 1998 remain flat due to the rationalization of certain
assets and the slow return of production volumes behind the field plants in 1999
resulting principally from the aforementioned producer behavior, offset by
volumes received through an alliance with an industry partner. In 2000, natural
gas processing volumes will be lower as a result of the aforementioned asset
sales. The lower volumes in 1999 and 1998 as compared to 1997 reflect the
economic decisions made during the 1998 period to reduce production at its
straddle processing plants principally as a result of the relationship of
natural gas and NGL commodity prices. Fractionation volumes and natural gas
liquids marketing volumes averaged 210.9 and 537.1 thousand barrels per day,
respectively, during 1999 reflecting significant increases over previous
periods. The fractionation volumes increased principally as a result of the
addition of the Lake Charles fractionator to the asset portfolio. The increases
in trading and marketing
46
<PAGE> 49
volumes reflect a more active world-wide trading and marketing presence as well
as an increasing operational focus on this sector of the business.
OPERATING CASH FLOW
Cash flow from operating activities totaled $8.8 million during the
year ended December 31, 1999 compared to $250.8 million during 1998 and $278.6
million during 1997. Changes in operating cash flow primarily reflect an
increase in inventory and an increase in non-cash earnings resulting from risk
management activities. Changes in other working capital accounts, which include
prepayments, other current assets and accrued liabilities, reflect expenditures
or recognition of liabilities for insurance costs, certain deposits, salaries,
taxes other than on income, certain deferred revenue accounts and other similar
items. Fluctuations in these accounts, period-to-period, reflect changes in the
timing of payments or recognition of liabilities and are not directly impacted
by seasonal factors. The 1997 period benefited from an advance payment for
future gas deliveries.
CAPITAL EXPENDITURES, COMMITMENTS AND DIVIDEND REQUIREMENTS
CAPITAL EXPENDITURES AND INVESTING ACTIVITIES. During the year ended
December 31,1999, the Company invested a net $318.7 million principally on power
generation assets, including a power generation partnership, and additional
expenditures related to maintenance capital improvements at existing facilities
and capital investment associated with technology infrastructure improvements.
During the year, the company sold certain Liquid's segment assets, an investment
held by the Energy Convergence segment and a 50 percent interest in a power
generation partnership, netting proceeds of $80.6 million.
During the year ended December 31, 1998, the Company invested a net
$295.1 million, principally on discrete asset acquisitions primarily focused in
the Energy Convergence segment. Expenditures were also made to complete
construction of the Lake Charles, Louisiana fractionator, for capital
improvements at existing facilities and on capital additions at the Company's
headquarters. During the period, the Company divested itself of its investment
in Ozark, as well as certain non-strategic Midstream Segment assets. Aggregate
net proceeds from these dispositions approximated $84 million.
During the year ended December 31, 1997, the Company spent a net $510.7
million, principally on the Destec Acquisition, the purchase of NCL's gas
marketing operations and on acquisitions of additional interests in gas
processing facilities, pipelines and other midstream assets. Expenditures were
also made on capital improvements at existing facilities and on capital
additions at the Company's headquarters. The Company invested $27.7 million in
its unconsolidated affiliates, principally for amounts committed to VESCO.
During the period, the Company divested itself of the Mont Belvieu I
fractionation facility pursuant to an agreement reached with the Federal Trade
Commission related to the Chevron Combination. Further, 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.
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 were entitled to receive
dividends or distributions equal per share in amount and kind to any dividend or
distribution payable on shares of the Company's common stock, when and as the
same are declared by the Company's Board of Directors. During the years ended
December 31, 1999, 1998 and 1997, the Company paid approximately $8.1 million,
$8.0 million and $7.9 million in cash dividends and distributions, respectively.
In May 1997, the Board of Directors approved a stock repurchase program
that allows 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 no shares in 1999 and 545,800 shares of its stock
47
<PAGE> 50
through open-market trades during the year ended December 31, 1998. Shares were
acquired in 1998 at a total cost of $6.9 million, or $12.65 per share on a
weighted average cost basis. For the year ended December 31, 1997, the Company
acquired 654,900 shares of its common stock in open-market transactions for an
aggregate cost of $10.5 million, or $16.04 per share on a weighted average cost
basis.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION
This Form 10-K contains various forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and information that are based on management's
beliefs as well as assumptions made by and information currently available to
management. When used in this document, words such as "anticipate", "estimate",
"project", "forecast" and "expect" reflect forward-looking statements. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable; it can give no assurance that such expectations will
prove to have been correct. Such statements are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, projected
or expected. Among the key risk factors that may have a direct bearing on
Dynegy's results of operations and financial condition are:
o Competitive practices in the industries in which Dynegy competes;
o Fluctuations in commodity prices for natural gas, electricity, natural gas
liquids, crude oil or coal;
o Fluctuations in energy commodity prices which could not or have not been
properly hedged or that are inconsistent with Dynegy's open position in its
energy marketing activities;
o Operational and systems risks;
o Environmental liabilities which are not covered by indemnity or insurance;
o Software, hardware or third-party failures resulting from Year 2000 issues;
o General economic and capital market conditions, including fluctuations in
interest rates; and
o 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.
In addition, as it relates to the proposed Illinova combination, there can be no
assurance that:
o We have correctly identified and assessed all of the factors affecting
Illinova's or Dynegy's businesses;
o The available information with respect to these factors on which we have
based our analysis is complete or correct;
o Our analysis is correct; or
o Our strategies, which are based in part on this analysis, will be
successful.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedule of the
Company are set forth at pages F-1 through F-36 inclusive, found at the end of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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 2000 Annual Meeting of
Stockholders (the "Proxy Statement") under the headings "Proposal 1 -- Election
of Directors" and "Executive Compensation -- Section 16(a) Beneficial Ownership
Reporting Compliance" and is incorporated herein by reference. The Proxy
Statement will be filed with the Securities and
48
<PAGE> 51
Exchange Commission not later than 120 days after December 31, 1999. Reference
is also made to the information appearing in Part I of this Annual Report on
Form 10-K under the caption "Item 1A. Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be contained in
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.
b. Exhibits -- The following instruments and documents are included as
exhibits to this Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
2.1 - Agreement and Plan of Merger among Dynegy Inc., Illinova Corporation and certain other
parties named therein (15)
2.2 - Amendment to Agreement and Plan of Merger among Dynegy Inc., Illinova Corporation and
other parties named therein (18)
2.3 - Combination Agreement and Plan of Merger, dated May, 22, 1996, by and between NGC
Corporation, Chevron U.S.A. Inc. and Midstream Combination Corp.(7)
2.4 - Amendment to Combination Agreement, dated as of August 29, 1996, by and among NGC
Corporation, Chevron U.S.A. Inc. and Midstream Combination Corp.(5)
2.5 - Agreement and Plan of Merger by and among Destec Energy, Inc., The Dow Chemical Company, NGC
Corporation and NGC Acquisition Corporation II dated as of February 17, 1997. (8)
2.6 - Asset Purchase Agreement by and between NGC Corporation and The AES Corporation dated as of
February 17, 1997. (8)
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
2.7 - First Amendment to Asset Purchase Agreement by and between NGC Corporation and The AES
Corporation dated June 29, 1997.(9)
2.8 - Asset Purchase Agreement between Destec Energy, Inc. and ECT EOCENE Enterprises, Inc. dated
July 1, 1997.(9)
3.1 - Articles of Incorporation of the Company (18)
3.2 - Articles of Amendment to the Company's Articles of Incorporation (18)
3.3 - Articles of Amendment to the Company's Articles of Incorporation (19)
+3.4 - Amended and Restated Bylaws of Dynegy Inc.
3.5 - Statement of Resolution Establishing Series of Series A Convertible Preferred Stock
filed with the Illinois Secretary of State on February 1, 2000. (19)
4.1 - Warrant exercisable for 6,228 shares of Common Stock of NGC Corporation registered in the
name of J. Otis Winters. (2)
4.2 - Indenture, dated as of December 11, 1995, by and between NGC Corporation, the Subsidiary
Guarantors named therein and the First National Bank of Chicago, as Trustee.(4)
4.3 - First Supplemental Indenture, dated as of August 31, 1996, by and among NGC Corporation, the
Subsidiary Guarantors named therein, and The First National Bank of Chicago, as Trustee,
supplementing and amending the Indenture dated as of December 11, 1995. (5)
4.4 - Second Supplemental Indenture, dated as of October 11, 1996, by and among NGC Corporation,
the Subsidiary Guarantors named therein, and The First National Bank of Chicago, as Trustee,
supplementing and amending the Indenture dated as of December 11, 1995. (5)
4.5 - Amended and Restated Credit Agreement dated as of June 27, 1997, among NGC Corporation and
The First National Bank of Chicago, Individually and as Agent, The Chase Manhattan Bank and
NationsBank of Texas, N.A., Individually and as Co-Agents, and the Lenders Named therein.(9)
4.6 - First Amendment to Amended and Restated Credit Agreement, dated November 24, 1997, among
NGC Corporation and The First National Bank of Chicago, Individually and as Agent, The Chase
Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents for the Lenders
named therein. (13)
4.7 - Second Amendment to Amended and Restated Credit Agreement, dated as of February 20, 1998,
among NGC Corporation and The First National Bank of Chicago, Individually and as Agent, The
Chase Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents for the
Lenders named therein. (13)
4.8 - Subordinated Debenture Indenture between NGC Corporation and The First National Bank of
Chicago, as Debenture Trustee, dated as of May 28, 1997. (10)
4.9 - Amended and Restated Declaration of Trust among NGC Corporation, Wilmington Trust Company, as
Property Trustee and Delaware Trustee, and the Administrative Trustees named therein, dated
as of May 28, 1997. (10)
4.10 - Series A Capital Securities Guarantee executed by NGC Corporation and The First National Bank
of Chicago, as Guarantee Trustee, dated as of May 28, 1997. (10)
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
4.11 - Common Securities Guarantee of NGC Corporation dated as of May 28, 1997. (10)
4.12 - Registration Rights Agreement, dated as of May 28, 1997, among NGC Corporation, NGC
Corporation Capital Trust I, Lehman Brothers, Salomon Brothers Inc. and Smith Barney Inc. (10)
4.13 - Second Supplemental Indenture among NGC Corporation, Destec Energy, Inc. and The First
National Bank of Chicago, as Trustee, dated as of June 30, 1997, supplementing and amending
the Indenture dated as of June 30, 1997. (11)
4.14 - Fourth Supplemental Indenture among NGC Corporation, Destec Energy, Inc. and The First
National Bank of Chicago, as Trustee, dated as of June 30, 1997, supplementing and amending
the Indenture dated as of December 11, 1995. (11)
4.15 - Fifth Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein
and The First National Bank of Chicago, as Trustee, dated as of September 30, 1997,
supplementing and amending the Indenture dated as of December 11, 1995. (13)
4.16 - Sixth Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein
and The First National Bank of Chicago, as Trustee, dated as of January 5, 1998,
supplementing and amending the Indenture dated as of December 11, 1995. (13)
4.17 - Seventh Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein
and The First National Bank of Chicago, as Trustee, dated as of February 20, 1998,
supplementing and amending the Indenture dated as of December 11, 1995. (13)
4.18 - Indenture, dated as of September 26, 1996, restated as of March 23, 1998, to include
amendments in the First through Fifth Supplemental Indentures, between NGC Corporation and
The First National Bank of Chicago, as Trustee. (13)
4.19 - Credit Agreement dated as of May 27, 1998, among NGC Corporation and The First National Bank
of Chicago, Individually and as Administrative Agent, The Chase Manhattan Bank, Individually
and as Syndication agent and NationsBank, N.A., Individually and as Documentation Agent and
the Lenders named therein. (12)
4.20 - 364-Day Revolving Credit Agreement dated as of May 27, 1998, among NGC Corporation and The
First National Bank of Chicago, Individually and as Administrative Agent, The Chase Manhattan
Bank, Individually and as Syndication agent and NationsBank, N.A., Individually and as
Documentation Agent and the Lenders named therein. (12)
4.21 - First Amendment to 364-Day Revolving Credit dated as of May 5, 1999 among Dynegy Inc. and
The First National Bank of Chicago, Individually and as Administrative Agent, The Chase
Manhattan Bank, Individually and as Syndication Agent, and Citibank N.A., Individually and as
Documentation Agent and the Lenders Named therein. (17)
10.1 - Agreement of Sale and Purchase of Assets, dated as of May 5, 1991, as amended on June 6,
1991 and August 30, 1991, by and between OXY USA Inc. and Trident Energy, Inc. (1)
10.2 - Master Agreement on Gas Processing, dated as of May 5, 1991, by and between OXY USA Inc. and
Trident NGL, Inc.(1)
10.3 - Dynegy Inc. Amended and Restated 1991 Stock Option Plan. (16)
10.4 - Dynegy Inc. 1998 U.K. Stock Option Plan (16)
</TABLE>
51
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
10.5 - Dynegy Inc. Amended and Restated Employee Equity Option Plan. (16)
+10.6 - Dynegy Inc. 1999 Long Term Incentive Plan.
+10.7 - Dynegy 2000 Long Term Incentive Plan.
10.8 - Employment Agreement dated April 2, 1996 by and between NGC Corporation and Stephen A.
Furbacher.(6)
+10.9 - Employment Agreement, effective February 1, 2000, between Charles L. Watson and Dynegy Inc.
+10.10 - Employment Agreement, effective February 1, 2000, between Stephen W. Bergstrom and Dynegy
Inc.
+10.11 - Employment Agreement, effective February 1, 2000, between John U. Clarke and Dynegy Inc.
+10.12 - Employment Agreement, effective February 1, 2000, between Kenneth E. Randolph and Dynegy Inc.
10.13 - Employment Agreement, dated as of July 1, 1997, by and between Dan Ryser and NGC Corporation.
10.14 - Lease Agreement entered into on June 12, 1996 between Metropolitan Life Insurance Company and
Metropolitan Tower Realty Company, Inc., as landlord, and NGC Corporation, as tenant. (6)
10.15 - First Amendment to Lease Agreement entered into on June 12, 1996 between Metropolitan Life
Insurance Company and Metropolitan Tower Realty Company, Inc., as landlord, and NGC
Corporation, as tenant. (6)
10.16 - Contribution and Assumption Agreement, dated as of August 31, 1996, among Chevron U.S.A.
Inc., Chevron Pipe Line Company, Chevron Chemical Company and Midstream Combination Corp. (5)
10.17 - Scope of Business Agreement, dated May 22, 1996 between Chevron Corporation and NGC
Corporation. (6)
10.18 - Master Alliance Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc., Chevron
Chemical Company, Chevron Pipe Line Company, and other Chevron U.S.A. Inc. affiliates, NGC
Corporation, Natural Gas Clearinghouse, Warren Petroleum Company, Limited Partnership,
Electric Clearinghouse, Inc. and other NGC Corporation affiliates. (5)
* 10.19 - Natural Gas Purchase and Sale Agreement, dated as of August 30, 1996, among Chevron U.S.A.
Inc. and Natural Gas Clearinghouse. (5)
* 10.20 - Master Natural Gas Processing Agreement, dated as of September 1, 1996, among Chevron U.S.A.
Inc. and Warren Petroleum Company, Limited Partnership. (5)
* 10.21 - Master Natural Gas Liquids Purchase Agreement, dated as of September 1, 1996, among Warren
Petroleum Company, Limited Partnership and Chevron U.S.A. Inc. (5)
* 10.22 - Gas Supply and Service Agreement, dated as of September 1, 1996, among Chevron Products
Company and Natural Gas Clearinghouse. (5)
</TABLE>
52
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
10.23 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc.
and Chevron U.S.A. Production Company. (6)
10.24 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc.
and Chevron Chemical Company. (6)
10.25 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc.
and Chevron Products Company. (6)
* 10.26 - Feedstock Sale and Refinery Product Purchase Agreements, dated as of September 1, 1996, among
Chevron Products Company and Warren Petroleum Company, Limited Partnership.(5)
* 10.27 - Refinery Product Sale Agreement (Hawaii), dated as of September 1, 1996, among Warren
Petroleum Company, Limited Partnership and Chevron Products Company. (5)
* 10.28 - Feedstock Sale and Refinery Product Master Services Agreement, dated as of September 1, 1996,
among Chevron Products Company and Warren Petroleum Company, Limited Partnership. (5)
* 10.29 - CCC Product Sale and Purchase Agreement dated as of September 1, 1996, among Warren Petroleum
Company, Limited Partnership and Chevron Chemical Company. (5)
* 10.30 - CCC/WPC Services Agreement, dated as of September 1, 1996, among Chevron Chemical Company and
Warren Petroleum Company, Limited Partnership. (5)
* 10.31 - Operating Agreement, dated as of September 1, 1996, among Warren Petroleum Company, Limited
Partnership and Chevron Pipe Line Company. (5)
10.32 - Galena Park Services Agreement, dated as of September 1, 1996, among Chevron Products Company
and Midstream Combination Corp. (5)
* 10.33 - Venice Complex Operating Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc.
and Warren Petroleum Company, Limited Partnership. (6)
* 10.34 - Time Charter, dated as of August 31, 1996, by and between Midstream Barge Company, L.L.C. and
Warren Petroleum Company, Limited Partnership. (5)
* 10.35 - Limited Liability Company Agreement of Midstream Barge Company, L.L.C., dated as of August
31, 1996, by and between Chevron U.S.A. Inc. and Warren Petroleum Company, Limited
Partnership. (5)
10.36 - Subscription Agreement between Energy Convergence Holding Company and Chevron U.S.A. Inc
(15)
10.37 - Stock Purchase Agreement between Energy Convergence Holding Company and British Gas
Atlantic Holdings BV and related Guaranty by British Gas Overseas Holdings Limited (15)
10.38 - Voting Agreement between Illinova and BG Holdings, Inc. (15)
10.39 - Voting Agreement between Illinova and NOVA Gas Services (U.S.) Inc. (15)
10.40 - Voting Agreement between Illinova and Chevron U.S.A. Inc. (15)
10.41 - Shareholder Agreement of Energy Convergence Holding Company with Chevron U.S.A. Inc. (15)
</TABLE>
53
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
10.42 - Registration Rights Agreement (NOVA Gas Services (U.S.) Inc. and British Gas Atlantic
Holdings BV) (15)
10.43 - First Amended and Restated Limited Partnership Agreement of the West Texas LPG Pipeline
Limited Partnership (17)
10.44 - Amended and Restated Operating Agreement of the West Texas LPG Pipeline Limited
Partnership and Chevron Pipeline Company (17)
10.45 - Dynegy Inc. Severance Pay Plan. (16)
10.46 - Registration Rights Agreement (Chevron U.S.A. Inc) (15)
10.47 - First Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17)
10.48 - Amendment No. 1 to the First Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17)
10.49 - Second Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17)
10.50 - Third Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17)
10.51 - Fourth Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17)
10.52 - Dynegy Midstream Services, Limited Partnership Supplemental Severance Pay Plan (17)
10.53 - NGC Profit Sharing/401(k) Savings Plan. (16)
10.54 - First Amendment to NGC Profit Sharing/401(k) Savings Plan. (16)
10.55 - Second Amendment to NGC Profit Sharing/401(k) Savings Plan. (16)
10.56 - Third Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. (17)
+10.57 - Fourth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan.
+10.58 - Fifth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan.
+10.59 - Sixth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan.
+10.60 - Seventh Amendment to Dynegy Inc. 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
54
<PAGE> 57
* Exhibit omits certain information which the Company has filed separately
with the Commission pursuant to a confidential treatment request pursuant
to Rule 406 promulgated under the Securities Act of 1933, as amended.
(1) Incorporated by reference to exhibits to the Registration Statement of
Trident NGL, Inc. on Form S-1, Registration No. 33-43871.
(2) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended September 30, 1993 of Trident NGL Holding,
Inc., Commission File No. 1-11156.
(3) Incorporated by reference to exhibits to the Registration Statement of
Trident NGL Holding, Inc. on Form S-4, Registration No. 33-88907.
(4) Incorporated by reference to the Registration Statement of NGC Corporation
on Form S-3, Registration No. 33-97368.
(5) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended September 30, 1996, of NGC Corporation,
Commission File No. 1-11156.
(6) Incorporated by reference to exhibits to the Registration Statement of
Midstream Combination Corp. on Form S-4, Registration No. 333-09419.
(7) Incorporated by reference to exhibits to the Current Report on Form 8-K of
NGC Corporation, dated May 22, 1996, Commission File No. 1-11156.
(8) Incorporated by reference to exhibits to the Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1996, of NGC Corporation, Commission
File No. 1-11156.
(9) Incorporated by reference to exhibits to the Current Report on Form 8-K of
NGC Corporation, Commission File No. 1-11156, dated June 27, 1997.
(10) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended June 30, 1997, Commission File No. 1-11156.
(11) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended September 30, 1997, Commission File No.
1-11156
(12) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended June 30, 1998, Commission File No. 1-11156.
(13) Incorporated by reference to exhibits to the Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1997, of NGC Corporation, Commission
File No. 1-11156.
(14) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period ended September 30, 1998, Commission File No.
1-11156.
(15) Incorporated by reference to exhibits to the Current Report on Form 8-K of
Dynegy Inc. dated June 14, 1999.
(16) Incorporated by reference to exhibits to the Annual Report in Form 10-K of
the Fiscal Year Ended December 31, 1998, of Dynegy Inc., Commission File
No. 1-11156.
(17) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended June 30, 1999, Commission File No. 1-11156.
(18) Incorporated by reference to exhibits to Amendment No. 1 to the
Registration Statement on Form S-4 of Energy Convergence Holding Company
filed with the Securities and Exchange Commission on September 7, 1999.
(19) Incorporated by reference to exhibits to Registration Statement on Form 8-A
of Dynegy Inc.
(b) Reports on Form 8-K of Dynegy Inc..
None.
55
<PAGE> 58
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 24, 2000 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 24, 2000 By: /s/ C. L. Watson
------------------------------------------
C. L. Watson, Chairman of the Board, Chief
Executive Officer and Director (Principal
Executive Officer)
Date: February 24, 2000 By: /s/ John U. Clarke
------------------------------------------
John U. Clarke, Executive Vice President,
Chief Financial Officer (Principal
Financial Officer) and Advisory Director
Date: February 24, 2000 By: /s/ Bradley P. Farnsworth
------------------------------------------
Bradley P. Farnsworth, Senior Vice
President and Controller (Principal
Accounting Officer)
Date: February 24, 2000 By: /s/ Stephen W. Bergstrom
------------------------------------------
Stephen W. Bergstrom, President and Chief
Operating Officer of Dynegy Inc. and
Director
Date: February 24, 2000 By: /s/ Charles E. Bayless
------------------------------------------
Charles E. Bayless, Director
Date: February 24, 2000 By: /s/ J. Joe Adorjan
------------------------------------------
J. Joe Adorjan, Director
56
<PAGE> 59
Date: February 24, 2000 By: /s/ Joe J. Stewart
------------------------------------------
Joe J. Stewart, Director
Date: February 24, 2000 By: /s/ Darald W. Callahan
------------------------------------------
Darald W. Callahan, Director
Date: February 24, 2000 By: /s/ Patricia A. Woertz
------------------------------------------
Patricia A. Woertz, Director
Date: February 24, 2000 By: /s/ R.H. Matzke
------------------------------------------
R.H. Matzke, Director
Date: February 24, 2000 By: /s/ John D. Zeglis
------------------------------------------
John D. Zeglis, Director
Date: February 24, 2000 By: /s/ Daniel L. Dienstbier
------------------------------------------
Daniel L. Dienstbier, Director
Date: February 24, 2000 By: /s/ J. Otis Winters
------------------------------------------
J. Otis Winters, Director
57
<PAGE> 60
DYNEGY INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
<S> <C>
Report of Independent Public Accountants........................................ F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997........................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997........................................... F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997....................... F-6
Notes to Consolidated Financial Statements...................................... F-7
FINANCIAL STATEMENT SCHEDULE
Condensed Financial Statements of the Registrant................................ F-36
</TABLE>
F-1
<PAGE> 61
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. (an Illinois corporation) and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Dynegy Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The information included in Schedule I is
presented for the purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our
audits of the basic financial statements and, in our opinion, is fairly stated
in all material respects in relation to the basic financial statements taken as
a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 28, 2000
F-2
<PAGE> 62
DYNEGY INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
-------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 45,230 $ 28,367
Accounts receivable, net 1,992,450 1,563,558
Accounts receivable, affiliates 48,966 60,180
Inventories 271,884 149,901
Assets from risk-management activities 379,833 219,105
Prepayments and other assets 66,717 96,130
-------------- ------------
2,805,080 2,117,241
-------------- ------------
PROPERTY, PLANT AND EQUIPMENT 2,575,100 2,446,878
Less: accumulated depreciation (557,219) (514,771)
-------------- ------------
2,017,881 1,932,107
-------------- ------------
OTHER ASSETS
Investments in unconsolidated affiliates 627,335 502,613
Assets from risk-management activities 452,913 135,100
Other assets 621,962 577,176
-------------- ------------
$ 6,525,171 $ 5,264,237
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,667,199 $ 1,370,902
Accounts payable, affiliates 161,500 113,827
Accrued liabilities and other 184,013 155,227
Liabilities from risk-management activities 334,080 251,213
Notes payable and current portion of long-term debt 191,731 135,154
-------------- ------------
2,538,523 2,026,323
LONG-TERM DEBT 1,299,333 953,001
OTHER LIABILITIES
Non-Recourse Debt 34,593 93,889
Liabilities from risk-management activities 321,252 40,747
Deferred income taxes 335,190 317,537
Other long-term liabilities 486,798 504,677
-------------- ------------
5,015,689 3,936,174
-------------- ------------
COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST 200,000 200,000
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 50,000,000 shares authorized; 8,000,000 shares
designated as Series A Participating Preferred Stock, 7,815,363 shares issued
and outstanding at December 31, 1999 and
1998, respectively 75,418 75,418
Common stock, $.01 par value, 400,000,000 shares authorized;
157,499,001 shares issued at December 31, 1999 and 153,298,220
shares issued at December 31, 1998 1,575 1,533
Additional paid-in capital 973,000 935,183
Retained earnings 277,074 133,340
Less: treasury stock, at cost: 1,200,700 shares at December 31, 1999
and 1,200,700 shares at December 31, 1998 (17,585) (17,411)
-------------- ------------
1,309,482 1,128,063
-------------- ------------
$ 6,525,171 $ 5,264,237
============== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 63
DYNEGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 15,429,976 $ 14,257,997 $ 13,378,380
Cost of sales 14,886,101 13,829,310 12,993,086
------------ ------------ ------------
Operating margin 543,875 428,687 385,294
Depreciation and amortization 129,458 113,202 104,391
Impairment, abandonment and other charges -- 9,644 275,000
General and administrative expenses 200,717 185,708 149,344
------------ ------------ ------------
Operating income (loss) 213,700 120,133 (143,441)
Equity in earnings of unconsolidated affiliates 79,854 91,038 58,959
Other income 73,287 46,821 28,113
Interest expense (78,164) (74,992) (63,455)
Other expenses (45,519) (7,677) (20,230)
Minority interest in income of a subsidiary (16,632) (16,632) (9,841)
------------ ------------ ------------
Income (loss) before income taxes 226,526 158,691 (149,895)
Income tax provision (benefit) 74,677 50,338 (62,210)
------------ ------------ ------------
Net income (loss) from continuing operations before 151,849 108,353 (87,685)
cumulative effect of accounting change
Cumulative effect of change in accounting
principle (net of income tax benefit of $7,913) -- -- (14,800)
------------ ------------ ------------
NET INCOME (LOSS) $ 151,849 $ 108,353 $ (102,485)
============ ============ ============
NET INCOME PER SHARE:
Net income (loss) from continuing operations $ 151,849 $ 108,353 $ (87,685)
Cumulative effect of change in accounting
principle (net of income tax benefit of $7,913) -- -- (14,800)
Less: preferred stock dividends (391) (391) (391)
------------ ------------ ------------
Net income (loss) applicable to common stockholders $ 151,458 $ 107,962 $ (102,876)
============ ============ ============
Basic earnings (loss) per share $ 0.98 $ 0.71 $ (0.68)
============ ============ ============
Diluted earnings per share $ 0.91 $ 0.66 $ n/a
============ ============ ============
Basic shares outstanding 154,198 151,619 150,653
============ ============ ============
Diluted shares outstanding 166,975 164,605 167,009
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 64
DYNEGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 151,849 $ 108,353 $ (102,485)
Items not affecting cash flows from operating activities:
Depreciation, amortization, impairment and abandonment 108,325 102,577 378,916
Equity in earnings of affiliates, net of cash distributions (13,754) (6,477) (4,073)
Risk management activities (115,138) (7,422) (8,757)
Deferred income taxes 63,167 52,308 (86,424)
Amortization of bond premium -- (2,572) (6,768)
Other, including gains on sale of assets (33,972) (22,540) 1,249
Change in assets and liabilities resulting from operating activities:
Accounts receivable (463,479) 51,046 (35,845)
Inventories (106,201) (17,380) 86,077
Prepayments and other assets 53,761 (30,605) (20,686)
Accounts payable 348,077 44,113 (22,601)
Accrued liabilities 37,001 (27,699) 14,064
Other, net (20,797) 7,078 85,922
------------ ------------ ------------
Net cash provided by operating activities 8,839 250,780 278,589
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (364,559) (298,738) (220,003)
Investment in unconsolidated affiliates (83,963) (78,096) (27,708)
Business acquisitions, net of cash acquired -- (2,644) (715,589)
Proceeds from asset sales 80,594 45,044 452,565
Other, net 49,264 39,352 --
------------ ------------ ------------
Net cash used in investing activities (318,664) (295,082) (510,735)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 397,488 212,259 2,218,500
Repayments of long-term borrowings (43,849) (493,277) (2,198,275)
Net cash flow from commercial paper and money market lines of credit (42,161) 350,758 --
Proceeds from sale of capital stock, options and warrants 21,855 3,863 5,147
Issuance of company obligated preferred securities of a
subsidiary trust, net -- -- 198,043
Treasury stock acquisitions (174) (6,905) (10,506)
Dividends and other distributions, net (8,115) (7,988) (7,925)
Other, net 1,644 (9,088) --
------------ ------------ ------------
Net cash provided by financing activities 326,688 49,622 204,984
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 16,863 5,320 (27,162)
Cash and cash equivalents, beginning of year 28,367 23,047 50,209
------------ ------------ ------------
Cash and cash equivalents, end of year $ 45,230 $ 28,367 $ 23,047
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 65
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,
1996 7,815 $ 75,418 149,847 $ 1,498 $ 896,432 $ 143,385 -- $ --
Net loss -- -- -- -- -- (102,485) -- --
Options exercised -- -- 1,541 15 11,577 -- -- --
Dividends and other
Distributions -- -- -- -- -- (7,925) -- --
401(k) plan and profit
sharing stock issuances -- -- 385 5 7,401 -- -- --
Options granted -- -- -- -- 4,044 -- -- --
Treasury stock acquisitions -- -- -- -- -- -- (655) (10,506)
Other -- -- 24 -- 266 -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31,
1997 7,815 75,418 151,797 1,518 919,720 32,975 (655) (10,506)
Net income -- -- -- -- -- 108,353 -- --
Options exercised -- -- 1,032 10 3,808 -- -- --
Dividends and other
Distributions -- -- -- -- -- (7,988) -- --
401(k) plan and profit
sharing stock issuances -- -- 457 5 6,822 -- -- --
Options granted -- -- -- -- 4,675 -- -- --
Treasury stock acquisitions -- -- -- -- -- -- (546) (6,905)
Other -- -- 12 -- 158 -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31,
1998 7,815 75,418 153,298 1,533 935,183 133,340 (1,201) (17,411)
Net income -- -- -- -- -- 151,849 -- --
Options exercised -- -- 3,523 35 21,992 -- -- --
Dividends and other
Distributions -- -- -- -- -- (8,115) -- --
401(k) plan and profit
sharing stock issuances -- -- 670 7 9,869 -- -- --
Options granted -- -- -- -- 6,028 -- -- --
Treasury stock acquisitions -- -- -- -- -- -- -- (174)
Other -- -- 8 -- (72) -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31,
1999 7,815 $ 75,418 157,499 $ 1,575 $ 973,000 $ 277,074 (1,201) $ (17,585)
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 66
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, the UK
and continental Europe. Products marketed by the Company's wholesale marketing
operations include natural gas, electricity, coal, emissions, natural gas
liquids, crude oil, liquid petroleum gas and related services. The Company's
wholesale marketing operations are supported by ownership or control of an
extensive asset base and transportation network that includes unregulated power
generation, gas and liquids storage capacity, gas, power and liquids
transportation capacity and gas gathering, processing and fractionation assets.
The Company is a holding company that conducts substantially all of its
business through its subsidiaries. From inception of operations in 1984 until
1990, Natural Gas Clearinghouse ("Clearinghouse") limited its activities
primarily to natural gas marketing. Starting in 1990, Clearinghouse expanded its
core business operations through acquisitions and strategic alliances resulting
in the formation of a midstream energy asset business and establishing energy
marketing operations in both Canada and the United Kingdom. The Company
initiated electric power marketing operations in February 1994. Effective March
1, 1995, Clearinghouse and Trident NGL Holding, Inc. ("Holding"), a fully
integrated natural gas liquids company, merged ("Trident Combination") and the
combined entity was renamed NGC Corporation ("NGC"). On August 31, 1996, NGC
completed a strategic combination with Chevron U.S.A. Inc. and certain Chevron
affiliates (collectively "Chevron") whereby substantially all of Chevron's
midstream assets merged with NGC ("Chevron Combination"). Effective July 1,
1997, NGC acquired Destec Energy, Inc. ("Destec Acquisition"), a leading
independent power producer. During 1998, the Company changed its name to Dynegy
Inc. On June 14, 1999, Dynegy and Illinova Corp. ("Illinova") announced the
execution of definitive agreements for the merger of Illinova and Dynegy. The
Illinova acquisition was closed on February 1, 2000 (see Note 17). Concurrent
with the closing, Dynegy Inc. changed its name to Dynegy Holding, Inc. and
Illinova was renamed Dynegy Inc.
The accounting policies of Dynegy conform to generally accepted
accounting principles. The more significant of such accounting policies are
described below. The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
develop estimates and make assumptions that affect reported financial position
and results of operations and that impact the nature and extent of disclosure,
if any, of contingent assets and liabilities. Actual results could differ from
those estimates.
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries after elimination of intercompany accounts and transactions.
Investments in affiliates in which the Company has a significant ownership
interest, generally 20 percent to 50 percent, are accounted for by the equity
method. Other investments are carried at cost. Certain reclassifications have
been made to prior-period amounts to conform with current-period financial
statement classifications.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents consist of all
demand deposits and funds invested in short-term investments with original
maturities of three months or less. At December 31, 1999, approximately $7
million of cash and cash equivalents was restricted.
CONCENTRATION OF CREDIT RISK. Dynegy provides multiple energy commodity
solutions principally to customers in the electric and gas distribution
industries and to entities engaged in industrial and petrochemical businesses.
These industry concentrations have the potential to impact the Company's overall
exposure to credit risk, either positively or negatively, in that the customer
base may be similarly affected by changes in economic, industry or other
conditions. Receivables are generally not collateralized; however, Dynegy
believes the credit risk posed by industry concentration is offset by the
diversification and creditworthiness of the Company's customer base.
INVENTORIES. Inventories consisting primarily of natural gas in storage
of $165.1 million and $78.2 million, natural gas liquids of $66.2 million and
$23.4 million, and crude oil of $10.7 million and $25.2 million at December 31,
1999 and 1998, respectively, are valued at the lower of weighted average cost or
at market. Materials and
F-7
<PAGE> 67
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
supplies inventory of $29.9 million and $23.1 million at December 31, 1999 and
1998, respectively, is carried at the lower of cost or market using the
specific-identification method.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment consisting
principally of gas gathering, processing, fractionation, terminalling and
storage facilities, natural gas transmission lines, pipelines, power generating
facilities and supporting infrastructure is recorded at cost. Expenditures for
major replacements and renewals are capitalized while expenditures for
maintenance, repairs and minor renewals to maintain facilities in operating
condition are expensed. Depreciation is provided using the straight-line method
over the estimated economic service lives of the assets, ranging from three to
30 years. Composite depreciation rates are applied to functional groups of
property having similar economic characteristics. Gains and losses are not
recognized for retirements of property, plant and equipment subject to composite
depreciation rates ("composite rate") until the asset group subject to the
composite rate is retired. The Company reviews the carrying value of its
long-lived assets in accordance with provisions of Financial Accounting Standard
No. 121, "Accounting for the Impairment of Long-Lived Assets."
ENVIRONMENTAL COSTS AND OTHER CONTINGENCIES. Environmental costs
relating to current operations are expensed or capitalized, as appropriate,
depending on whether such costs provide future economic benefit. Liabilities are
recorded when environmental assessment indicates that remedial efforts are
probable and the costs can be reasonably estimated. Measurement of liabilities
is based on currently enacted laws and regulations, existing technology and
site-specific costs. Such liabilities may be recognized on a discounted basis if
the amount and timing of anticipated expenditures for a site are fixed or
reliably determinable; otherwise, such liabilities are recognized on an
undiscounted basis. Environmental liabilities in connection with assets that are
sold or closed are realized upon such sale or closure, to the extent they are
probable, can be estimated and have not previously been reserved. In assessing
environmental liabilities, no offset is made for potential insurance recoveries.
Recognition of any joint and several liability is based upon the Company's best
estimate of its final pro rata share of such liability.
Liabilities for other contingencies are recognized upon identification
of an exposure, which when fully analyzed indicates that it is both probable
that an asset has been impaired or that a liability has been incurred and that
such loss amount can be reasonably estimated. Costs to remedy such contingencies
or other exposures are charged to a reserve, if one exists, or otherwise to
current operations.
GOODWILL AND OTHER INTANGIBLE ASSETS. Intangible assets, principally
goodwill, are generally amortized by the straight-line method over an estimated
useful life of up to 30 years. At December 31, 1999 and 1998, unamortized
goodwill was classified as an other long-term asset aggregating $364.7 million
and $392.3 million, respectively.
REVENUE RECOGNITION. Revenues for product sales and gas processing and
marketing services are recognized when title passes to the customer or when the
service is performed. Fractionation and transportation revenues are recognized
based on volumes received in accordance with contractual terms. Revenues derived
from power generation are recognized upon output, product delivery or
satisfaction of specific targets, all as specified by contractual terms. Fees
derived from engineering and construction contracts and development and other
activities received from joint ventures in which Dynegy holds an equity interest
are deferred to the extent of Dynegy's ownership interest and amortized on a
straight-line basis over appropriate periods, which vary according to the nature
of the service provided and the ventures' operations.
Substantially all of the operations of the Company's world-wide gas
marketing, power marketing, and crude marketing operations are accounted for
under a mark-to-market accounting methodology. Under mark-to-market accounting,
fixed-price forwards, swaps, options, futures and other financial instruments
with third parties are reflected at fair market value, net of reserves, with
resulting unrealized gains and losses recorded as assets and liabilities from
risk management activities in the consolidated balance sheets. The accrual
method of accounting is used for accounting for NGL marketing activities.
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
F-8
<PAGE> 68
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
foreign currency exchange rates and may execute swaps, forward-exchange
contracts or other financial instruments to manage these exposures. Financial
instruments that are utilized in the Company's trading operations are considered
to be trading and accounted for accordingly. Gains and losses from hedging
transactions are recognized in income and are reflected as cash flows from
operating activities in the periods for which the underlying commodity, interest
rate or foreign currency transaction was hedged. If the necessary correlation to
the commodity, interest rate or foreign currency transaction being hedged ceases
to exist, the Company ceases to account for the contract as a hedge and
recognizes a gain or loss to the extent the contract results have not been
offset by the effects of price or interest rate changes on the hedged item since
inception of the hedge. If the underlying being hedged by the commodity,
interest rate or foreign currency transaction is disposed of or otherwise
terminated, the gain or loss associated with such contract(s) is no longer
deferred and is recognized in the period the underlying is eliminated.
INCOME TAXES. The Company files a consolidated United States federal
income tax return and, for financial reporting purposes, provides income taxes
for the difference in the tax and financial reporting bases of its assets and
liabilities in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes."
EARNINGS PER SHARE. Basic earnings per share represents the amount of
earnings for the period available to each share of common stock outstanding
during the period. Diluted earnings per share represents the amount of earnings
for the period available to each share of common stock outstanding during the
period plus each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding during the
period. Differences between basic and diluted shares outstanding in all periods
are attributed to the Series A Preferred Stock, options outstanding and a
warrant.
FOREIGN CURRENCY TRANSLATIONS. For subsidiaries whose functional
currency is other than U.S. dollar, assets and liabilities are translated at
year-end rates of exchange and revenues and expenses are translated at average
exchange rates prevailing during the year. For each of the three years in the
period ended December 31, 1999, items of other comprehensive income were
immaterial to the Company's operating results.
NOTE 2 -- RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
Dynegy's operating results are impacted by commodity price, interest
rate and foreign exchange rate fluctuations. The Company routinely enters into
financial instrument contracts to hedge purchase and sale commitments, fuel
requirements and inventories in its natural gas, natural gas liquids, crude oil,
electricity and coal businesses in order to minimize the risk of market
fluctuations. However, as a result of marketplace liquidity and other factors,
the Company may, at times, be unable to hedge certain identified market risks.
Further, the Company may, at times, have a bias in the market, within
established guidelines, resulting from the management of its commodity
portfolios. Dynegy also monitors its exposure to fluctuations in interest rates
and foreign currency exchange rates and may execute swaps, forward-exchange
contracts or other financial instruments to manage these exposures.
The Energy Convergence segment includes the integrated component
businesses: wholesale gas marketing, wholesale power marketing and power
generation. Operating margins earned by wholesale gas and power marketing,
exclusive of risk-management activities, are relatively insensitive to commodity
price fluctuations since most of the purchase and sales contracts do not contain
fixed-price provisions. Generally, prices contained in these contracts are tied
to a current spot or index price and, therefore, adjust directionally with
changes in overall market conditions. However, market price fluctuations for
natural gas and electricity can have a significant impact on the operating
margin derived from risk-management activities in these businesses. Dynegy
generally attempts to balance its fixed-price physical and financial purchase
and sales commitments in terms of contract volumes, and the timing of
performance and delivery obligations. To the extent a net open position exists,
fluctuating commodity market prices can impact Dynegy's financial position or
results of operations, either favorably or unfavorably. The net open positions
are actively managed, and the impact of changing prices on the Company's
financial condition at a point in time is not necessarily indicative of the
impact of price movements throughout the year. Historically, fuel costs,
principally natural gas, represented the primary variable cost impacting the
financial performance of the Company's
F-9
<PAGE> 69
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
investment in power generating facilities. Operating margins at these facilities
were relatively insensitive to commodity price fluctuations since most purchase
and sales contracts contained variable power sales contract features tied to a
current spot or index natural gas price, allowing revenues to adjust
directionally with changes in natural gas prices. However, the Company's
investment strategy, which emphasizes growth of merchant generation capacity, is
altering the makeup of its generation asset portfolio. The growth of merchant
generation capacity as a percentage of total available capacity increases the
Company's exposure to commodity price risk. The financial performance and cash
flow derived from merchant generation capacity is impacted, either favorably or
unfavorably, by changes in and the relationship between natural gas and
electricity prices.
Operating margins associated with the Midstream segment's natural gas
gathering, processing and fractionation activities are very sensitive to changes
in natural gas liquids prices, principally as a result of contractual terms
under which natural gas is processed and products are sold by these businesses
and the availability of inlet volumes. In addition, certain of the Midstream
Businesses' processing plant assets are impacted by changes in, and the
relationship between, natural gas and natural gas liquids prices which, in turn
influences the volumes of gas processed. Commodity price fluctuations also
impact the operating margins derived from the Midstream segment's natural gas
liquids and crude oil marketing businesses.
Dynegy's commercial groups manage, on a portfolio basis, the market
risks inherent in their transactions, subject to parameters established by the
Dynegy Board of Directors. Market risks are monitored by a risk control group
that operates independently from the commercial units that create or actively
manage these risk exposures to ensure compliance with Dynegy's risk management
policies. Risk measurement is also practiced against the Dynegy portfolios with
stress testing and scenario analysis.
ACCOUNTING FOR RISK MANAGEMENT ACTIVITIES. Effective with the adoption
of Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy Trading
and Risk Management Activities" ("EITF 98-10") on January 1, 1999, substantially
all of the operations of the Company's world-wide gas marketing, power
marketing, and crude marketing operations are accounted for under a
mark-to-market accounting methodology. Under mark-to-market accounting,
fixed-price forwards, swaps, options, futures and other financial instruments
with third parties are reflected at fair market value, net of reserves, with
resulting unrealized gains and losses recorded as assets and liabilities from
risk management activities in the consolidated balance sheets. These assets and
liabilities are affected by the actual timing of settlements related to these
contracts and current-period changes resulting primarily from newly originated
transactions and the impact of price movements. These changes are recognized as
revenues in the consolidated statements of operations in the period in which the
change occurs. Market prices used to value outstanding financial instruments
reflect management's consideration of, among other things, closing exchange and
over-the-counter quotations, the time value of money and volatility factors
underlying the commitments. In certain of these markets, long-term contract
commitments may extend beyond the period in which market quotations for such
contracts are available. The lack of long-term pricing liquidity requires the
use of mathematical models to value these commitments under the accounting
method employed. These mathematical models utilize historical market data to
forecast future elongated pricing curves, which are used to value the
commitments that reside outside of the liquid market quotations. Realized cash
returns on these commitments may vary, either positively or negatively, from the
results estimated through application of forecasted pricing curves generated
through application of the mathematical model. Dynegy believes that its
mathematical models utilize state-of-the-art technology, pertinent industry data
and prudent discounting in order to forecast certain elongated pricing curves.
These market prices are adjusted to reflect the potential impact of liquidating
Dynegy's position in an orderly manner over a reasonable period of time under
present market conditions.
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES. Dynegy measures
entity-wide market risk in its financial trading and risk-management portfolios
using value at risk. The quantification of market risk using value at risk
provides a consistent measure of risk across diverse energy markets and products
with different risk factors in order to set the overall corporate risk
tolerance, to determine risk targets, and to set position limits. The use of
this methodology requires a number of key assumptions including the selection of
a confidence level and the holding period to liquidation. Dynegy relies on value
at risk to determine the maximum potential reduction in the trading portfolio
value allowed within a given probability over a defined period. Because of
limitations to value at risk,
F-10
<PAGE> 70
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dynegy uses other means to monitor market risk in the trading portfolios. In
addition to value at risk, Dynegy performs regular stress and scenario analysis
to measure extreme losses due to exceptional events. The value at risk and
stress testing results are reviewed to determine the maximum allowable reduction
in the total equity of the commodity portfolios. Additional measures are used to
determine the treatment of risks outside the value at risk methodologies, such
as market volatility, liquidity, event and correlation risk.
CREDIT AND MARKET RESERVES. In connection with the market valuation of
its energy commodity contracts, the Company maintains certain reserves for a
number of risks associated with these future commitments. Among others, these
include reserves for credit risks based on the financial condition of
counterparties, reserves for product location ("basis") differentials and
consideration of the time value of money for long-term contracts. Counterparties
in its trading portfolio consist principally of financial institutions, major
energy companies and local distribution companies. The creditworthiness of these
counterparties may impact overall exposure to credit risk, either positively or
negatively; however, with regard to its counterparties Dynegy maintains credit
policies that management believes minimize overall credit risk. Determination of
the credit quality of its counterparties is based upon a number of factors,
including credit ratings, financial condition, project economics and collateral
requirements. When applicable, the Company employs standardized agreements that
allow for the netting of positive and negative exposures associated with a
single counterparty. Based on these policies, its current exposures and its
credit reserves, Dynegy does not anticipate a material adverse effect on its
financial position or results of operations as a result of counterparty
nonperformance. The following table displays the mark-to-market portfolio value
of Dynegy's energy commodity risk management transactions at December 31, 1999:
<TABLE>
<CAPTION>
BELOW
INVESTMENT INVESTMENT
GRADE CREDIT GRADE CREDIT
QUALITY QUALITY TOTAL
------------ ------------ ------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Utilities and power generators ........................ $ 112,383 $ (2,033) $ 110,350
Financial institutions ................................ 37,173 -- 37,173
Oil and gas producers ................................. 21,594 5,142 26,736
Industrial companies .................................. 2,167 5,849 8,016
Other ................................................. 419 16 435
------------ ------------ ------------
Value of fixed-price transactions before reserves ..... $ 173,736 $ 8,974 182,710
============ ============ (38,177)
Reserves .............................................. ------------
$ 144,533
Net fixed-price value ................................. ============
</TABLE>
At December 31, 1999, the term of Dynegy's risk management portfolio
extends to 2007 and the average remaining life of an individual transaction was
3 months.
COMPREHENSIVE CHANGE IN ACCOUNTING PRINCIPLES. Effective January 1,
1999, the Company adopted the provisions of EITF 98-10 pursuant to the
implementation requirements stated therein. The effect of adoption of the
provisions of EITF 98-10 was to alter the Company's comprehensive method of
accounting for energy-related contracts, as defined in that statement, resulting
in changes to the accounting for certain commodity activity principally in the
gas marketing operations in the United Kingdom and power and crude oil trading
operations world-wide. The cumulative effect of this change in accounting
principle was not material to the estimated annual 1999 results of operations.
The pro forma effect on prior periods of the adoption of the provisions of EITF
98-10 was not determinable.
The Company continues to analyze the effects of adoption of the rules
promulgated by Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"). Provisions in
Statement No. 133 will affect the accounting and disclosure of contractual
arrangements and operations of the Company. The Financial Accounting Standards
Board recently deferred implementation of the provisions of
F-11
<PAGE> 71
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement No. 133 to fiscal periods beginning after June 15, 2000. Dynegy
intends to adopt the provisions of Statement No. 133 within the timeframe and in
accordance with the requirements provided by that statement.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The following disclosure of the
estimated fair value of financial instruments is made in accordance with the
requirements of SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments." The estimated fair-value amounts have been determined by the
Company using available market information and selected valuation methodologies.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. The use of different market assumptions or valuation
methodologies could have a material effect on the estimated fair-value amounts.
The carrying values of current assets and liabilities approximate fair
values due to the short-term maturities of these instruments. The carrying
amounts and fair values of the Company's other financial instruments were:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1999 1998
------------------------------- --------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------------- -------------- -------------- --------------
($ in thousands)
<S> <C> <C> <C> <C>
Commercial Paper ................................. $ 456,482 $ 456,482 $ 518,643 $ 518,643
Money market lines of credit ..................... 40,000 40,000 20,000 20,000
Canadian Credit Agreement ........................ 40,000 40,000 40,000 40,000
6.75% Senior Notes, due 2005 ..................... 150,000 145,000 150,000 152,000
7.625% Senior Debentures, due 2026 ............... 175,000 163,000 175,000 179,000
7.125% Senior Debentures, due 2018 ............... 175,000 157,000 175,000 172,000
6.875% Senior Notes, due 2002 .................... 200,000 197,000 -- --
7.45% Senior Notes, due 2006 ..................... 200,000 196,000 -- --
Non-Recourse Debt ................................ 89,175 89,175 103,126 103,126
Preferred Securities of a Subsidiary Trust ....... 200,000 191,000 200,000 204,000
Interest rate risk-management contracts .......... -- (2,761) -- (8,474)
Foreign currency risk-management contracts ....... 2,685 2,545 4,418 5,491
Commodity risk-management contracts .............. 97,185 94,406 (29,222) (30,977)
</TABLE>
The financial statement carrying amounts of the Company's credit
agreement, variable-rate debt and power generation notes were assumed to
approximate fair value. The fair values of the Company's other long-term
indebtedness, including the Preferred Securities of a Subsidiary Trust , were
based on quoted market prices by financial institutions that actively trade
these debt securities. The fair value of the Company's cost basis investments
was not estimated as the investments were considered immaterial. The fair value
of interest rate, foreign currency and commodity risk-management contracts were
based upon the estimated consideration that would be received to terminate those
contracts in a gain position and the estimated cost that would be incurred to
terminate those contracts in a loss position. The interest rate swap contracts,
foreign currency forward exchange contracts and commodity swap and option
agreements extend for periods of up to 11, 3 and 8 years, respectively. The
absolute notional contract amounts associated with the commodity
risk-management, interest rate and forward exchange contracts, respectively,
were as follows:
F-12
<PAGE> 72
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Natural Gas (Trillion Cubic Feet) 5.702 4.179 2.558
Electricity (Million Megawatt Hours) 42.949 1.835 2.244
Natural Gas Liquids (Million Barrels) 19.902 6.397 4.355
Crude Oil (Million Barrels) 35.554 18.800 14.920
Interest Rate Swaps (in thousands of US Dollars) $ 36,524 $ 69,332 $ 180,000
Fixed Interest Rate Paid on Swaps (Percent) 8.210 8.067 6.603
U.K. Pound Sterling (in thousands of US Dollars) $ 85,812 $ 69,254 $ 74,638
Average U.K. Pound Sterling Contract Rate (in US Dollars) $ 1.6191 $ 1.6143 $ 1.5948
Canadian Dollar (in thousands of US Dollars) $ 288,898 $ 268,307 $ 37,041
Average Canadian Dollar Contract Rate (in US Dollars) $ 0.6775 $ 0.6710 $ 0.7240
</TABLE>
Cash-flow requirements for these commodity risk-management, interest
rate and foreign exchange contracts were estimated based upon market prices in
effect at December 31, 1999. Cash-flow requirements were as follows:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 BEYOND
-------------- -------------- -------------- -------------- -------------- --------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Future estimated net inflows
(outflows) based on year
end market prices/rates $ 33,893 $ 13,735 $ 13,958 $ 13,711 $ 12,447 $ 6,446
============== ============== ============== ============== ============== ==============
</TABLE>
NOTE 3 -- CASH FLOW INFORMATION
Detail of supplemental disclosures of cash flow and non-cash investing
and financing information was:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Interest paid (net of amount capitalized) $ 80,393 $ 83,376 $ 60,323
============== ============== ==============
Taxes paid (net of refunds) $ 1,927 $ (8,000) $ 8,043
============== ============== ==============
Detail of businesses acquired:
Current assets and other $ -- $ 5,144 $ 547,505
Fair value of non-current assets -- 101,630 503,789
Liabilities assumed, including deferred taxes -- (104,130) (268,092)
Capital stock issued and options exercised -- -- --
Cash balance acquired -- -- (67,613)
-------------- -------------- --------------
Cash paid, net of cash acquired $ -- $ 2,644 $ 715,589
============== ============== ==============
</TABLE>
F-13
<PAGE> 73
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT
Investments in property, plant and equipment consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
------------ ------------
($ IN THOUSANDS)
<S> <C> <C>
Energy Convergence Segment and Other $ 638,181 $ 407,945
Midstream Segment:
Natural gas processing 1,210,713 1,241,658
Fractionation 176,961 185,198
Liquids marketing 141,397 139,328
Natural gas gathering and transmission 353,966 429,631
Crude oil 53,882 43,118
------------ ------------
2,575,100 2,446,878
Less: accumulated depreciation (557,219) (514,771)
------------ ------------
$ 2,017,881 $ 1,932,107
============ ============
</TABLE>
Interest capitalized related to costs of projects in process of
development totaled $16.7 million, $7.6 million and $8.8 million for each of the
three years in the period ended December 31, 1999.
In the second quarter of 1998 and the fourth quarter of 1999, the
Company purchased the outstanding partnership interests held by third parties in
three separate limited partnerships, each formed for the purpose of owning and
operating a discrete power generation facility in the State of California. As of
the effective date of each transaction, the Company began consolidating the
aggregate assets, liabilities and results of operations associated with these
projects. In January 2000, these partnership interests were sold as a condition
precedent to the Illinova acquisition.
NOTE 5 -- UNCONSOLIDATED AFFILIATES
The equity method of accounting is used for investments in certain
partnerships and for investments in companies in which Dynegy has a voting
interest between 20 percent and 50 percent. Such investments include:
ACCORD ENERGY LIMITED ("ACCORD"). Accord was formed in 1994 to market
energy resources in the United Kingdom and Europe. Prior to 1997, Dynegy owned a
49 percent limited partner interest in Accord. In January 1997, such interest
was converted to a 25 percent participating preferred stock interest.
NICOR ENERGY, L.L.C. ("NICOR"). NICOR is a retail energy alliance
formed with NICOR Energy Management Services, a subsidiary of NICOR Inc., to
provide energy services to industrial, commercial and residential customers in
the Midwest. Dynegy owns a 50 percent interest in this Delaware limited
liability company. At December 31, 1999, the unamortized excess of the Company's
investment in this joint venture over its equity in the underlying net assets of
the affiliate approximated $2 million.
SOUTHSTAR ENERGY SERVICES L.L.C. ("SOUTHSTAR"). SouthStar is a retail
energy alliance formed with AGL Resources Inc. and Piedmont Natural Gas Company.
The company offers a combination of unregulated energy products and services to
industrial, commercial and residential customers in the Southeast. Dynegy owns a
20 percent interest in this Delaware limited liability company.
POWER GENERATION PARTNERSHIPS. Dynegy owns interests in fourteen joint
ventures, each formed to build, own and operate cogeneration facilities. The
Company's interests in these joint ventures range from eight to 50 percent. Each
partnership interest is accounted for under the equity method. Construction of
the cogeneration facilities owned by each of the joint ventures was project
financed and the obligations of the joint ventures are non-recourse to the
Company. At December 31, 1999, the unamortized excess of the Company's
investment in these joint ventures over its equity in the
F-14
<PAGE> 74
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
underlying net assets of the affiliates approximated $155 million. This amount
is being amortized on the straight-line method over the estimated economic
service lives of the underlying assets. In January 2000, seven of these
partnership interests were sold as a condition precedent to the Illinova
acquisition.
QUICKTRADE L.L.C. ("QUICKTRADE"). Quicktrade, a Delaware limited
liability company, was formed to develop, implement and operate an electronic
trading system. Dynegy owned a 65.5 percent interest in this LLC during 1998 and
the LLC was consolidated in the accompanying financial statements during 1998.
During 1996 and 1997, the Company owned varying interests in Quicktrade and
accounted for its interest under the equity method for the majority of those
years. Effective January 1, 1999, the Company sold its interest in Quicktrade.
GULF COAST FRACTIONATORS ("GCF"). GCF is a Texas limited partnership
that owns and operates a natural gas liquids fractionation facility located in
Mont Belvieu, Texas. Dynegy owns a 38.75 percent limited partner interest in
GCF. At December 31, 1999, the unamortized excess of the Company's investment in
GCF over its equity in the underlying net assets of the affiliate approximated
$15 million. This amount is being amortized on the straight-line method over the
estimated economic service life of the GCF assets.
WEST TEXAS LPG PIPELINE PARTNERSHIP ("WEST TEXAS PARTNERSHIP"). The
West Texas Partnership, a Texas limited partnership, holds all of the assets
comprising the West Texas Pipeline, an interstate natural gas liquids pipeline.
Dynegy acquired a 49 percent interest in the West Texas Partnership as part of
the Chevron Combination. Effective May 1, 1999, Dynegy's interest in the West
Texas Partnership was reduced to 39.2 percent, upon admittance of Mid-America
Pipeline Company ("MAPL"), a subsidiary of Williams into the partnership. At
December 31, 1999, the unamortized excess of the Company's investment in the
West Texas Partnership over its equity in the underlying net assets of the
affiliate approximated $25 million. This amount is being amortized on the
straight-line method over the estimated economic service life of the underlying
assets.
VENICE ENERGY SERVICES COMPANY, L.L.C. ("VESCO"). VESCO is a Delaware
limited liability company that owns and operates a natural gas processing,
extraction, fractionation and storage facility located in Plaquemines Parish,
Louisiana. Dynegy is operator of the facility and originally acquired a 37
percent interest in Venice Gas Processing Company ("Venice") effective November
1, 1996. In 1997, Venice reorganized as a limited liability company and, in
September 1997, the VESCO members agreed to expand ownership in VESCO to include
an affiliate of Shell Midstream Enterprises, a subsidiary of Shell Oil Company
("Shell"), effective September 1, 1997, in exchange for Shell's commitment of
certain offshore reserves to VESCO. The transaction reduced Dynegy's interest in
VESCO from 37 percent to approximately 32 percent, as of the effective date.
Koch Energy Services Company ("Koch") acquired an interest in VESCO during 1998
pursuant to its contribution of a cryogenic gas-processing unit to VESCO. The
transaction reduced Dynegy's interest in VESCO to approximately 23 percent.
Dynegy operates the facility and has commercial responsibility for product
distribution and sales. At December 31, 1999, the unamortized excess of the
Company's investment in this joint venture over its equity in the underlying net
assets of the affiliate approximated $10 million.
WASKOM GAS PROCESSING COMPANY ("WASKOM"). Waskom is a Texas general
partnership that owns and operates a natural gas processing, extraction and
fractionation facility located in Henderson County, Texas. Dynegy owns a 33.33
percent in Waskom. Dynegy operates the facility and has commercial
responsibility for product distribution and sales.
BARGE CO. Barge Co., a Delaware limited liability company, owns
pressurized LPG barges used in transporting LPGs principally in the Gulf of
Mexico. Dynegy owns a 25 percent interest in Barge Co. At December 31, 1999, the
unamortized excess of the Company's investment in Barge Co. over its equity in
the underlying net assets of the affiliate approximated $9 million. This amount
is being amortized on the straight-line method over the estimated economic
service lives of the underlying assets.
Aggregate equity method investment at December 31, 1999, 1998 and 1997,
was $618.6 million, $498.5 million and $466.4 million, respectively. Dividends
received on these investments during each of the three years in
F-15
<PAGE> 75
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the period ended December 31, 1999, totaled $66.1 million, $85 million and $54.9
million, respectively. Summarized aggregate financial information for these
investments and Dynegy's equity share thereof was:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- --------------------------
TOTAL EQUITY SHARE TOTAL EQUITY SHARE TOTAL EQUITY SHARE
---------- ------------ ---------- ------------ ---------- ------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Current assets (1)(2) $ 317,731 $ 110,094 $ 324,462 $ 131,169 $ 283,787 $ 112,895
Non-current assets (1)(2) 1,973,318 786,636 1,983,731 803,333 1,830,106 736,667
Current liabilities (1)(2) 296,009 98,179 292,481 124,016 202,754 86,476
Non-current liabilities (1)(2) 1,050,740 420,842 1,160,639 485,673 1,249,874 521,691
Operating margin (1)(2)(3) 366,675 135,352 397,391 159,288 209,877 86,154
Net income (1)(2)(3) 134,836 55,376 157,054 68,706 83,601 33,799
</TABLE>
1. The financial data for all periods presented is exclusive of amounts
attributable to the Company's investment in Accord as disclosure data was
unavailable for these periods. Dynegy's share of Accord earnings for each
of the three years in the period ended December 31, 1999, totaled $21.0
million, $21.8 million and $25.9 million, respectively.
2. The financial data for all periods presented is exclusive of amounts
attributable to the Company's investment in NCL (see Note 11) as such
information was not comparable period-to-period, as a result of the NCL
restructuring. Dynegy sold its interest in NCL effective April 1, 1997.
Dynegy's share of NCL's loss for the three months ended March 31, 1997,
totaled $892,000.
3. Equity earnings derived from investments acquired in the Destec acquisition
accrue to Dynegy commencing July 1, 1997.
The cost method of accounting is generally used to account for
investment in partnerships or companies in which Dynegy has a voting interest of
less than 20 percent. At December 31, 1999, the Company had five cost basis
investments: Indeck North American Power Fund, L.P., Indeck North American Power
Partners, L.P. (collectively "Indeck"), Altra Energy Technologies, Inc.,
Canadian Midstream Services, Ltd. and Compton Petroleum Corporation. Indeck is
engaged in the acquisition and operation of electric power generating
facilities. Altra provides business-to-business e-commerce products and services
to the energy market. Canadian Midstream is a private company that acquires
businesses engaged in gas processing and associated gas gathering systems.
Compton Petroleum is located in Canada and is an independent exploration and
production company. Dynegy's aggregate investment in these entities totaled $8.7
million and $4.1 million at December 31, 1999 and 1998, respectively, and Dynegy
received an aggregate $0.4 million, $0.5 million and $0.5 million of dividends
from Indeck during each of the three years in the period ended December 31,
1999. The Indeck investments totalling $4.2 million were sold in February 2000.
NOTE 6 -- DEBT
Debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
------------ ------------
($ IN THOUSANDS)
<S> <C> <C>
Commercial Paper $ 456,482 $ 518,643
Money market lines of credit 40,000 20,000
Canadian Credit Agreement 40,000 40,000
6.75% Senior Notes, due 2005 150,000 150,000
7.625% Senior Debentures, due 2026 175,000 175,000
7.125% Senior Debentures, due 2018 175,000 175,000
6.875% Senior Notes, due 2002 200,000 --
7.45% Senior Notes, due 2006 200,000 --
Non-Recourse Debt 89,175 103,126
Other, non-interest bearing -- 275
------------ ------------
1,525,657 1,182,044
Less: long-term debt due within one year 191,731 135,154
------------ ------------
$ 1,333,926 $ 1,046,890
============ ============
</TABLE>
F-16
<PAGE> 76
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 6.2 percent, and 6.1
percent at December 31, 1999 and 1998, respectively. Amounts outstanding under
the uncommitted money market lines of credit bore interest at an average rate of
6.1 percent at December 31, 1999. The Company classifies outstanding commercial
paper and borrowings under money market lines of credit as long-term debt to the
extent of availability under existing committed credit facilities, as
management's intent is to maintain these obligations for longer than one year,
subject to an overall reduction in corporate debt levels.
CREDIT AGREEMENTS. In May 1998, Dynegy refinanced its then existing
revolving credit agreement with a $400 million, five-year revolving credit
agreement that matures May 27, 2003, and a $400 million, 364-day revolving
credit agreement originally maturing in May 1999 and renewed through May 2000
(the "Credit Agreements"). The Credit Agreements provide funding for letters of
credit, working capital, capital expenditures and general corporate purposes,
including commercial paper support. The Credit Agreements also require payment
of various costs and fees, including an annual fee of 0.10 percent of the
committed amount under the Credit Agreements. Generally, borrowings under the
Credit Agreements bear interest at a Eurodollar rate plus a margin that is
determined based on the Company's unsecured senior debt rating. At December 31,
1999, such margin was 0.30 percent. Financial covenants in the Credit Agreements
are limited to a debt to capitalization test. Letters of credit under the Credit
Agreements aggregated approximately $36.1 million at December 31, 1999.
After consideration of the outstanding commercial paper, the unused
borrowing capacity under the Credit Agreements approximated $267.4 million at
December 31, 1999.
CANADIAN CREDIT AGREEMENT. In November 1998, an indirect wholly owned
Canadian subsidiary of the Company entered into a $60 million, two-year
revolving credit facility, which matures on November 24, 2000 (the "Canadian
Credit Agreement"). This agreement provides funding for general corporate
purposes. The Canadian Credit Agreement requires payment of various costs and
fees, including an annual fee of 0.25 percent of the committed amount under the
agreement. Generally, borrowings under this agreement bear interest at a
Eurodollar rate plus a margin that is determined based on the Company's
unsecured senior debt rating. At December 31, 1999, such margin was 0.40
percent. The Canadian subsidiary's obligations under the Canadian Credit
Agreement are fully and unconditionally guaranteed by the Company. At December
31, 1999, outstanding amounts under the facility totaled $40.0 million, at an
average interest rate of 6.66 percent.
6.875% SENIOR NOTES DUE 2002. In July 1999, Dynegy sold $200 million of
6.875 percent Senior Notes due July 15, 2002. These notes were issued at a price
of 99.890 percent, which after deducting underwriting discounts and commissions,
resulted in net proceeds to the Company of approximately $199 million. The net
proceeds from the sale were used to repay a portion of the outstanding
indebtedness under the commercial paper program. Interest on these notes is
payable semiannually on January 15 and July 15 of each year. The notes are
redeemable only at maturity. At issuance, the notes were priced based on the
then existing yield for 3-year U.S. Treasury Notes plus a spread based
principally on the Company's credit rating.
6.75% SENIOR NOTES DUE 2005. In December 1995, Dynegy sold $150 million
of 6.75 percent Senior Notes due December 15, 2005. These notes were issued at a
price of 99.984 percent, which, after deducting underwriting discounts and
commissions, resulted in net proceeds to the Company of approximately $149
million. Proceeds from the sale were used to repay a portion of the outstanding
indebtedness under the then existing revolving credit agreement. Interest on the
notes is payable semiannually on June 15 and December 15 of each year. At
issuance, the notes were priced based on the then existing yield for 10-year
U.S. Treasury Notes ("10-Year Base Treasury Rate") plus a spread based
principally on the Company's credit rating. Prior to issuing these notes, the
Company entered into two separate transactions with two separate financial
institutions, the effect of which was to lock in the 10-Year Base Treasury Rate
at approximately 6.2 percent on the full $150 million face value of this
issuance.
F-17
<PAGE> 77
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7.45% SENIOR NOTES DUE 2006. In July 1999, Dynegy sold $200 million of
7.45 percent Senior Notes due July 15, 2006. These notes were issued at a price
of 99.929 percent, which after deducting underwriting discounts and commissions,
resulted in net proceeds to the Company of approximately $198.6 million. The net
proceeds from the sale were used to repay a portion of outstanding indebtedness
under the commercial paper program. Interest on the notes is payable
semiannually on January 15 and July 15 of each year. These notes are redeemable,
at the option of the Company, in whole or in part from time to time, at a
formula based redemption price as defined in the associated indenture. At
issuance, these notes were priced based on a benchmark Treasury of similar terms
plus a spread principally based on the Company's credit rating.
7.625% SENIOR DEBENTURES DUE 2026. In October 1996, Dynegy sold $175
million of 7.625 percent Senior Debentures due October 15, 2026. These
debentures were issued at a price of 99.522 percent, which, after deducting
underwriting discounts and commissions, resulted in net proceeds to the Company
of approximately $173 million. The net proceeds were used to repay a portion of
the outstanding indebtedness under the then existing revolving credit agreement.
Interest on the debentures is payable semiannually on April 15 and October 15 of
each year. These debentures are redeemable, at the option of the Company, in
whole or in part from time to time, at a formula based redemption price as
defined in the associated indenture. At issuance, the debentures were priced
based on the then existing yield for 30-year U.S. Treasury Notes ("30-Year Base
Treasury Rate") plus a spread based principally on the Company's credit rating.
Prior to issuing the debentures, the Company entered into a transaction, the
effect of which was to lock in the 30-Year Base Treasury Rate at approximately
7.0 percent on $150 million of the $175 million face value of this issuance.
7.125% SENIOR DEBENTURES DUE 2018. In May 1998, Dynegy sold $175
million of 7.125 percent Senior Debentures due May 15, 2018. These debentures
were issued at a price of 99.654 percent, which, after deducting underwriting
discounts and commissions, resulted in net proceeds of approximately $173
million. Proceeds from the sale were used to retire short-term debt incurred in
connection with the redemption of certain high-cost debt acquired in an
acquisition. Interest on the debentures is payable semiannually on May 15 and
November 15 of each year. These debentures are redeemable, at the option of the
Company, in whole or in part from time to time, at a formula based redemption
price as defined in the associated indenture. At issuance, the debentures were
priced based on the then existing 30-Year Base Treasury Rate plus a spread based
principally on the Company's credit rating. Prior to issuing these debentures,
the Company entered into a series of transactions, the effect of which was to
lock in the 30-Year Base Treasury Rate at approximately 6.0 percent on $148
million of the $175 million face value of this issuance.
NON-RECOURSE DEBT. Included in the December 31, 1999 consolidated
long-term debt balance was $89.2 million representing the aggregate principal
balance outstanding under three separate notes. These notes are project specific
debt with recourse only to three identified power generation projects. Each of
the three notes represents a fifteen-year term loan obligation payable in
semi-annual installments of principal plus accrued interest. Each note bears
interest at a base rate plus a margin, as defined in each agreement. Interest
rate swaps effectively fix the base rate on $63.3 million of the indebtedness at
a weighted average rate of 8.085 percent. These notes are related to the
Qualifying Facilities that were sold in February 2000.
Aggregate maturities of all long-term indebtedness are: 2000 - $191.7
million; 2001 - $2.6 million; 2002 - $202.6 million; 2003 - $402.1 million; 2004
- - $3.0 million; 2005 and beyond - $723.7 million.
F-18
<PAGE> 78
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 -- INCOME TAXES
The Company is subject to U.S. federal, foreign and state income taxes
on its operations. Components of income tax expense (benefit) were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
------------ ------------ ------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense (benefit):
Domestic $ -- $ (608) $ 13,230
Foreign 11,510 (1,362) 3,071
Deferred tax expense (benefit):
Domestic 56,558 44,565 (81,306)
Foreign 6,609 7,743 2,795
------------ ------------ ------------
Income tax provision (benefit) $ 74,677 $ 50,338 $ (62,210)
============ ============ ============
</TABLE>
Components of income (loss) before income taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
------------ ------------ ------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic $ 165,606 $ 133,867 $ (180,127)
Foreign 60,920 24,824 30,232
------------ ------------ ------------
$ 226,526 $ 158,691 $ (149,895)
============ ============ ============
</TABLE>
Deferred income taxes are provided for the temporary differences
between the tax basis of Dynegy's assets and liabilities and their reported
financial statement amounts. Significant components of deferred tax liabilities
and assets were:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
------------ ------------
($ IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Loss carryforward $ 149,321 $ 132,445
Tax credits 11,893 10,798
------------ ------------
161,214 143,243
Valuation allowance -- --
------------ ------------
161,214 143,243
------------ ------------
Deferred tax liabilities:
Items associated with capitalized costs 496,404 460,780
------------ ------------
Net deferred tax liability $ 335,190 $ 317,537
============ ============
</TABLE>
Realization of the aggregate deferred tax asset is dependent on the
Company's ability to generate taxable earnings in the future. There was no
valuation allowance established at December 31, 1999 or 1998, as management
believes the aggregate deferred asset is more likely than not to be fully
realized in the future.
Income tax provision (benefit) for the years ended December 31, 1999,
1998 and 1997, was equivalent to effective rates of 33 percent, 32 percent and
(41) percent, respectively. Differences between taxes computed at the U.S.
federal statutory rate and the Company's reported income tax provision (benefit)
were:
F-19
<PAGE> 79
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Expected tax at U.S. statutory rate $ 79,284 $ 55,444 $ (52,463)
State taxes 3,285 2,564 (3,676)
Foreign tax benefit (3,203) (2,300) (5,415)
Basis differentials and other (4,689) (5,370) (656)
------------ ------------ ------------
Income tax provision (benefit) $ 74,677 $ 50,338 $ (62,210)
============ ============ ============
</TABLE>
At December 31, 1999, the Company had approximately $404 million of
regular tax net operating loss carryforwards. The net operating loss
carryforwards expire from 2006 through 2019. Certain provisions of the Internal
Revenue Code place an annual limitation on the Company's ability to utilize tax
carryforwards existing as of the date of a 1995 business acquisition. Management
believes such carryforwards will be fully realized prior to expiration.
NOTE 8 -- COMPANY OBLIGATED PREFERRED SECURITIES OF A SUBSIDIARY TRUST
In May 1997, NGC Corporation Capital Trust I ("Trust") issued, in a
private transaction, $200 million aggregate liquidation amount of 8.316%
Subordinated Capital Income Securities ("Trust Securities") representing
preferred undivided beneficial interests in the assets of the Trust. The Trust
invested the proceeds from the issuance of the Trust Securities in an equivalent
amount of 8.316% Subordinated Debentures ("Subordinated Debentures") of the
Company. The sole assets of the Trust are the Subordinated Debentures. The Trust
Securities are subject to mandatory redemption in whole but not in part on June
1, 2027, upon payment of the Subordinated Debentures at maturity, or in whole
but not in part at any time, contemporaneously with the optional prepayment of
the Subordinated Debentures, as allowed by the associated indenture. The
Subordinated Debentures are redeemable, at the option of the Company, in whole
at any time or in part from time to time, at formula-based redemption prices, as
defined in the indenture. The Subordinated Debentures represent unsecured
obligations of the Company and rank subordinate and junior in right of payment
to all Senior Indebtedness to the extent and in the manner set forth in the
associated indenture. The Company has irrevocably and unconditionally
guaranteed, on a subordinated basis, payment for the benefit of the holders of
the Trust Securities the obligations of the Trust to the extent the Trust has
funds legally available for distribution to the holders of the Trust Securities,
as described in the indenture ("Guarantee"). Distributions on the Trust
Securities are payable each June 1 and December 1, coinciding with the interest
payment due dates on the Subordinated Debentures, and are classified in the
accompanying Statement of Operations as "minority interest in income of a
subsidiary." The periodic distributions accruing at an annual rate of 8.316
percent of the aggregate liquidation amount are recorded as minority interest in
income of a subsidiary in the Company's consolidated statement of operations. So
long as no Debenture Event of Default, as defined, has occurred and continues,
the Company has the right to defer the payment of interest on the Subordinated
Debentures for any Extension Period elected by the Company, which period cannot
extend beyond 10 consecutive semi-annual periods, end on a date other than an
Interest Payment Date or extend beyond the Stated Maturity Date. The Trust has
executed an exchange offer through which all of the outstanding Trust Securities
were exchanged by the holders thereof for registered securities having
substantially the same rights and obligations.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
LITIGATION. Through its acquisition of Destec Energy Inc., Dynegy
became a party to certain litigation with Pacific Gas and Electric Company
("PG&E") and with the Southern California Gas Company ("SOCAL"). These cases
represent pre-acquisition contingencies acquired by the Company and settlement
thereof did not have a material adverse effect on the Company's results of
operations or financial position. The following describes resolution of these
two cases.
F-20
<PAGE> 80
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 1997, PG&E had filed a lawsuit in the Superior Court of the
State of California, City and County of San Francisco, against Destec Energy,
Inc., Destec Holdings, Inc. and Destec Operating Company (wholly-owned
subsidiaries of the Company now known respectively as Dynegy Power Corp., Dynegy
Power Holdings, Inc. and Dynegy Operating Company) as well as against San
Joaquin CoGen Limited ("San Joaquin") and its general partners (collectively the
"Dynegy Defendants"). In the lawsuit, PG&E asserted claims and alleged
unspecified damages for fraud, negligent misrepresentation, unfair business
practices, breach of contract and breach of the implied covenant of good faith
and fair dealing. Subsequent to the acquisition of Destec Energy Inc. by Dynegy,
Dynegy and PG&E engaged in settlement discussions, which resulted in the
execution of a Termination and Settlement Agreement between PG&E and the Dynegy
Defendants on March 9, 1999 (the "PG&E Settlement Agreement"). The PG&E
Settlement Agreement provided for, upon the receipt of CPUC approval, a
dismissal with prejudice of PG&E's claims against the Dynegy Defendants, a
release by PG&E of all claims relative to FERC matters and a termination of the
San Joaquin power purchase agreement as of December 31, 1999, whereupon the San
Joaquin facility would continue to operate as a merchant plant. Upon termination
of the power purchase agreement, Dynegy would repay project debt of
approximately $26 million. By Order dated October 7, 1999, the CPUC approved the
PG&E Settlement Agreement. The CPUC approval became final on November 8, 1999.
Pursuant to its lawsuit against Dynegy, PG&E had named Libbey-Owens-
Ford ("LOF"), San Joaquin's steam host, as an additional defendant in the action
in October 1997. It is alleged that San Joaquin was liable to PG&E under the Gas
Transportation Agreement or Power Purchase Agreement due to LOF's failure to use
sufficient quantities of steam as required to retain its status as a qualifying
facility under federal standards. The Dynegy Defendants will seek to recover
from LOF losses resulting from the settlement with PG&E.
In March 1995, SOCAL had filed a lawsuit in the Superior Court of the
State of California for the County of Los Angeles, against Destec Energy, Inc.,
Destec Holdings and Destec Gas Services, Inc. (now known respectively as Dynegy
Power Corp., Dynegy Holdings, Inc. and Dynegy Gas Services, Inc.), wholly-owned
direct and indirect subsidiaries of the Company (collectively, the
"Defendants"), as well as against Chalk Cliff Limited and McKittrick Limited
(collectively, the "Partnerships"). All general partners of the Partnerships are
also named defendants. The lawsuit alleged breach of contract against the
Partnerships and their respective general partners, and interference and
conspiracy to interfere with contracts against the Defendants. The breach of
contract claims arose out of the "transport-or-pay" provisions of the gas
transportation service agreements between the Partnerships and SOCAL. SOCAL
sought damages from the Partnerships for past damages and anticipatory breach
damages in an amount equal to approximately $31,000,000. Subsequent to the
acquisition of Destec Energy Inc.by Dynegy, Dynegy and SOCAL engaged in
settlement discussions, which resulted in the execution of a Settlement
Agreement between SOCAL and all defendants in the pending litigation on August
25, 1999, (the "SOCAL Settlement Agreement"). The SOCAL Settlement Agreement was
approved by the CPUC and is final. The Settlement Agreement provided for the
dismissal of the pending litigation, the termination of underlying gas
transmission service contracts, and Dynegy's payment of settlement consideration
approximating $31 million. The pending appeals were dismissed and the litigation
and the associated foreclosure proceedings have therefore come to an end.
On August 3, 1998, Modesto Irrigation District ("MID") filed a lawsuit
against PG&E and Destec in federal court for the Northern District of
California, San Francisco division. The lawsuit alleges violation of federal and
state antitrust laws and breach of contract against Destec. The allegations are
related to a power sale and purchase arrangement in the city of Pittsburg, CA.
MID seeks actual damages from PG&E and Destec in amounts not less than $25
million. MID also seeks a trebling of any portion of damages related to its
antitrust claims. By order dated February 2, 1999, the federal District Court
dismissed MID's state and federal antitrust claims against PG&E and Destec;
however, the Court granted MID leave of thirty days to amend its complaint to
state an antitrust cause of action. On March 3, 1999, MID filed an amended
complaint recasting its federal and state antitrust claims against PG&E and
Destec and restating its breach of contract claim against Destec. PG&E and
Destec have filed motions to dismiss MID's revised federal and state antitrust
claims. The hearing on the motions to dismiss was held in July 1999. On August
20, 1999, the District Court again dismissed MID's antitrust claims against PG&E
and Destec, this time without leave to amend the complaint. As a result of the
dismissal of the antitrust claims, the District Court also dismissed the pendant
state law claims. MID has appealed the District Court's dismissal of its suit to
the Ninth Circuit Court of Appeal.
F-21
<PAGE> 81
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following dismissal of its federal court suit, MID filed suit in California
state court asserting its breach of contract claims against Destec and its
tortious interference with contract claims against PG&E. Motions to dismiss
MID's state court claims are pending and scheduled for hearing in first quarter
2000. Dynegy believes the allegations made by MID are meritless and will
continue to vigorously defend MID's claims. In the opinion of management, the
amount of ultimate liability with respect to these actions will not have a
material adverse effect on the financial position or results of operations of
the Company.
On July 30, 1999, The Dow Chemical Company ("Dow") filed a lawsuit in
the United States District Court for the District of Delaware against Dynegy
Power Corporation ("DPC"), a wholly-owned subsidiary of the Company. Dow sought
contribution from DPC in connection with claims against Dow asserted by The AES
Corporation ("AES") in a lawsuit filed on November 30, 1998 in the United States
District Court for the Southern District of Texas. AES asserts various federal
and Texas securities laws claims, and Texas claims for fraud and civil
conspiracy, arising out of AES' September 1997 purchase of stock of Destec
Engineering, a subsidiary of DPC (at that time Destec Power Corp). Specifically,
AES alleges that Destec Power made certain misrepresentations about the expected
profits that Destec Engineering would earn in connection with the construction
of the Elsta power plant in The Netherlands, and the anticipated completion date
of the Elsta plant. AES alleges that Dow is liable because it "controlled" or
had the power to control the management of Destec Power. AES's original
complaint did not assert any claims against Destec Power or any other Dynegy
entity. Dow is vigorously defending against AES' claims. In response to a motion
to transfer filed by Dow, the United States District Court for the Southern
District of Texas transferred the suit to the United States District Court for
Delaware. Following transfer of the litigation, AES added DPC as a defendant,
asserting claims similar to the claims asserted against Dow. Dow subsequently
dismissed the suit against DPC without prejudice. AES and DPC have reached a
settlement of AES's claims against DPC. The settlement is currently before the
District Court for approval. If approved by the District Court, the settlement
will result in the dismissal of AES's suit against DPC with prejudice. In the
opinion of management, the ultimate resolution of this lawsuit will not have a
material adverse effect on the Company's financial position.
COMPLAINT AGAINST ILLINOIS POWER COMPANY. On November 3, 1999, the U.S.
Environmental Protection Agency ("EPA") issued a Notice of Violation ("NOV")
against Illinois Power Company ("Illinois Power") and, with the Department of
Justice ("DOJ"), filed a Complaint against Illinois Power in the U.S. District
Court for the Southern District of Illinois, No. 99C833. Similar notices and
lawsuits have been filed against a number of other utilities. Both the NOV and
Complaint allege violations of the Clean Air Act and regulations thereunder.
More specifically, both allege, based on the same events, that certain equipment
repairs, replacements and maintenance activities at Illinois Power's three
Baldwin Station generating units constituted "major modifications" under either
or both the Prevention of Significant Deterioration and the New Source
Performance Standards regulations. When non-exempt "major modifications" occur,
the Clean Air Act and related regulations generally require that generating
facilities meet more stringent emissions standards. The DOJ amended its
complaint to assert the claims found in the NOV. Illinois Power is filing
responsive pleadings in the first quarter 2000.
The regulations under the Clean Air Act provide certain exemptions to
the definition of "major modifications," particularly an exemption for routine
repair, replacement or maintenance. The Company has analyzed each of the
activities covered by the EPA's allegations and believes each activity
represents prudent practice regularly performed throughout the utility industry
as necessary to maintain the operational efficiency and safety of equipment. As
such, the Company believes that each of these activities is covered by the
exemption for routine repair, replacement and maintenance and that the EPA is
changing, or attempting to change through enforcement actions, the intent and
meaning of its regulations.
The Company also believes that, even if some of the activities in
question were found not to qualify for the routine exemption, there were no
increases either in annual emissions or in the maximum hourly emissions
achievable at any of the units caused by any of the activities. The regulations
provide an exemption for increased hours of operation or production rate and for
increases in emissions resulting from demand growth.
F-22
<PAGE> 82
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Although none of Illinois Power's other facilities are covered in the
Complaint and NOV, the EPA has officially requested information concerning
activities at Illinois Power's Vermilion, Wood River and Hennepin Plants. It is
possible that the EPA will eventually commence enforcement actions against those
plants as well.
The EPA has the authority to seek penalties for the alleged violations
in question at the rate of up to $27,500 per day for each violation. The EPA
also will be seeking installation of "best available control technology"
("BACT") (or equivalent) at the Baldwin Station and possibly at the other three
plants as well.
The Company believes that the EPA's and DOJ's claims are without merit,
and that the ultimate resolution of this lawsuit will not have a material
adverse effect on the Company's financial position or results of operations.
The Company assumed liability for various claims and litigation in
connection with the Illinova acquisition, Chevron Combination, the Trident
Combination, the Destec acquisition and in connection with the acquisition of
certain gas processing and gathering facilities from Mesa Operating Limited
Partnership. The Company believes, based on its review of these matters and
consultation with outside legal counsel, that the ultimate resolution of such
items will not have a material adverse effect on the Company's financial
position or results of operations. Further, the Company is subject to various
legal proceedings and claims, which arise in the normal course of business. In
the opinion of management, the amount of ultimate liability with respect to
these actions will not have a material adverse effect on the financial position
or results of operations of the Company.
COMMITMENTS. In conducting its operations, the Company routinely enters
into long-term commodity purchase and sale commitments, as well as agreements
that commit future cash flow to the lease or acquisition of assets used in its
businesses. These commitments are typically associated with capital projects,
reservation charges associated with firm transmission, transportation and
storage capacity, lease agreements for ship charters and other distribution
assets and leases for office space, equipment and other similar items. The
following describes the more significant commitments outstanding at December 31,
1999.
The Company is engaged in a continuous capital asset expansion program
consistent with its business plan and energy convergence strategies. The
emphasis of this capital asset program is on the acquisition or construction of
strategically located power generation assets. Consistent with this strategy and
as a result of the long lead time required by industry manufacturers, a
subsidiary of the Company has executed or is currently negotiating purchase
orders to acquire in excess of forty state-of-the-art gas-fired turbines,
representing a capital commitment of approximately $1.3 billion. Delivery of the
manufactured turbines will occur ratably through 2003. Commitments under these
purchase orders are generally payable consistent with the delivery schedule. The
purchase orders include milestone requirements by the manufacturer and provide
Dynegy with the ability to cancel each discrete purchase order commitment in
exchange for a fee, which escalates over time. The capital asset program is
subject to periodic review and revision, and the actual number of projects and
aggregate cost for such projects will be dependent on various factors including
available capital resources, market conditions, legislative actions, load
growth, changes in materials, supplies and labor costs and the identification of
partners in order to spread investment risk.
The Company routinely enters into supply and market contracts for the
purchase and sale of electricity, some of which contain fixed capacity payments.
Obligations under these supply contracts, which are not already fair valued on
the balance sheet at December 31, 1999, totaled $212 million on a discounted
basis. Such obligations are generally payable on a ratable basis, the term of
which extends through 2011. In return for such fixed capacity payments, Dynegy
receives volumes of electricity at agreed prices, which it then may re-market.
Based on year-end estimates, the market value of electricity available for sale
under these contracts exceeds the cost of such electricity, which amount
includes the fixed capacity payments disclosed herein.
In October 1999, the Company announced that it had achieved all of the
necessary approvals to begin construction on its Heard County Power Project, a
500-megawatt natural gas-fired, simple-cycle peaking facility located in
Franklin in Heard County, Georgia. A Dynegy subsidiary will design and construct
the generating facility, as agent for a third party, and Dynegy is obligated to
guarantee approximately 90 percent of the actual cost of the
F-23
<PAGE> 83
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
project during the construction phase. It is anticipated that Dynegy will
subsequently lease the completed facility from that third party for an initial
term of five years. Under certain circumstances, the Company maintains an option
to purchase the facility from the third party and it may participate in the
outright sale of the asset.
A wholly owned subsidiary of the Company leases a power-generating
asset under an agreement that is classified as an operating lease. This
agreement has aggregate future minimum lease payments of approximately $7.1
million at December 31, 1999.
In 1997, Dynegy received cash from a gas purchaser as an advance
payment for future natural gas deliveries over a ten-year period ("Advance
Agreement"). As a condition of the Advance Agreement, Dynegy entered into a
natural gas swap with a third party under which Dynegy became a fixed-price
payor on identical volumes to those to be delivered under the Advance Agreement
at prices based on then current market rates. The cash payment was classified as
an advance on the balance sheet and is ratably reduced as gas is delivered to
the purchaser under the terms of the Advance Agreement. In addition, the
purchaser pays a monthly fee to Dynegy associated with delivered volumes. The
Advance Agreement contains certain non-performance penalties that impact both
parties and as a condition precedent, Dynegy purchased a surety bond in support
of its obligations under the Advance Agreement.
Minimum commitments in connection with office space, equipment,
reservation charges under purchase and firm transportation contracts, power
generating and other leased assets were: 2000 - $71.6 million; 2001 - $47.0
million; 2002 - $26.9 million; 2003 - $13.3 million; and 2004 and beyond -
$100.6 million. Rental payments made under the terms of these arrangements
totaled - $ 69.0 million in 1999, $126.1 million in 1998 and $85.2 million in
1997.
NOTE 10 -- CAPITAL STOCK
At December 31, 1999, the Company had authorized capital stock
consisting of 450,000,000 shares, of which 50,000,000 shares, par value $0.01
per share, are designated preferred stock and 400,000,000 shares, par value
$0.01 per share, are designated common stock.
On the effective date of the Illinova acquisition, Dynegy had authorized capital
as follows:
o 300,000,000 shares of Class A common stock, no par value;
o 120,000,000 shares of Class B common stock, no par value;
o 70,000,000 shares of preferred stock, no par value.
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. These shares remained outstanding at December 31, 1999. As part of the
Illinova acquisition, these shares were converted to shares of Class B common
stock of Dynegy on a 0.69-for-one exchange ratio.
Pursuant to the terms of the Illinova acquisition, Dynegy established a
series of preferred stock, designated as Series A Convertible Preferred Stock,
which was issued to British Gas Atlantic and NOVA Corporation in accordance with
the exchange ratios provided in the merger documents. On the effective date of
the merger, BG and NOVA held an aggregate 6.7 million shares of this Series A
Convertible Preferred Stock. Holders of this Series A preferred stock are
entitled to receive dividends or distributions totaling $3.00 per share annually
if and when declared by the Board of Directors of the Company out of funds
legally available therefor. Dividends on the preferred shares are cumulative
from the date of issuance and are payable quarterly on the last day of March,
June, September and December. This
F-24
<PAGE> 84
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series A Convertible Preferred Stock carries certain priority, liquidation,
redemption, conversion and voting rights not available to the common
shareholders.
COMMON STOCK. At December 31, 1999, there were 157,499,001 shares of
common stock issued and 1,200,700 shares were held in treasury. During 1999,
Dynegy paid quarterly cash dividends on its common stock of $0.0125 per share,
or $0.05 per share on an annual basis.
Pursuant to the terms of the Illinova acquisition, Dynegy split its
common shares into two classes, Class A and Class B. Generally, holders of Class
A and Class B common stock are entitled to one vote per share on all matters to
be voted upon by the shareholders. Holders of Class A common stock may cumulate
votes in connection with the election of directors. The election of directors
and all other matters will be by a majority of shares represented and entitled
to vote, except as otherwise provided by law. Holders of Class B common stock
vote together with holders of Class A common stock as a single class on every
matter acted upon by the shareholders except for the following matters:
o the holders of Class B common stock vote as a separate class for the
election of three directors of Dynegy Inc., while the holders of Class A
common stock vote as a separate class for the remaining directors;
o any amendment to the special corporate governance rights of Class B common
stock, must be approved by a majority of the directors elected by holders
of Class B common stock attending a meeting where such amendment is
considered and a majority of all Dynegy directors or by a 66 2/3 percent of
the outstanding shares of Class B common stock voting as a separate class,
and the affirmative vote of a majority of the shares of Class A and Class B
common stock, voting together as a single class; and
o any amendment to the provision of the articles of incorporation addressing
the voting rights of holders of Class A and Class B common stock requires
the approval of 66 2/3 percent of the outstanding shares of Class B common
stock voting as a separate class, and the affirmative vote of a majority of
the shares of Class A and Class B common stock, voting together as a single
class.
Subject to the preferences of the preferred stock, holders of Class A
and Class B common stock have equal ratable rights to dividends out of funds
legally available for that purpose, when and if dividends are declared by the
board of directors. Holders of Class A common stock and Class B common stock are
entitled to share ratably, as a single class, in all of the assets of Dynegy
available for distribution to holders of shares of common stock upon the
liquidation, dissolution or winding up of the affairs of Dynegy, after payment
of Dynegy's liabilities and any amounts to holders of preferred stock.
A share of Class B common stock automatically converts into a share of
Class A common stock upon the transfer to any person other than an affiliate of
Chevron. Additionally, each share of Class B common stock automatically converts
into a share of Class A common stock if the holders of all Class B common stock
cease to own collectively 15 percent of the outstanding common stock of Dynegy.
Conversely, any shares of Class A common stock acquired by Chevron or its
affiliates will automatically convert into shares of Class B common stock, so
long as Chevron and its affiliates continue to own 15 percent or more of the
outstanding voting power of Dynegy.
Holders of Class A and Class B common stock generally are not entitled
to preemptive rights, subscription rights, or redemption rights, except that,
Chevron, who holds all of the shares of Class B common stock, is entitled to
certain preemptive rights under the shareholders agreement. The rights and
preferences of holders of Class A common stock are subject to the rights of any
series of preferred stock Dynegy may issue.
Beginning in 2000, Holders of Class A and Class B common stock will be
entitled to a $0.60 per share dividend if, when and as declared by the Board of
Directors of the Company out of funds legally available therefor.
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 (1.1 million shares as adjusted for the Illinova
acquisition exchange ratio) in open market transactions. At December 31, 1999,
approximately 399,000
F-25
<PAGE> 85
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares (276,000 shares as adjusted for the Illinova acquisition exchange ratio)
remained available for repurchase under this program.
STOCK WARRANTS. At December 31, 1999, 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. Such share and per share value amounts are before
application of the exchange ratio pursuant to the Illinova acquisition.
STOCK OPTIONS. Each option granted is valued at an option price, which
ranges from $2.03 per share to the fair market value per share at date of grant.
The difference between the option price and the fair market value, if any, of
each option on the date of grant is recorded as compensation expense over a
vesting period. Options granted at prices below fair market do not become
exercisable until the fifth anniversary date of the grant, at which time they
become fully exercisable. Options granted at market value vest and become
exercisable ratably over a three-year period. The average exercise price of
vested options at December 31, 1999 was $8.39. Compensation expense related to
options granted totaled $6.0 million, $4.7 million and $4.0 million for the
years ended December 31, 1999, 1998 and 1997, respectively. At December 31,
1999, employee stock options aggregating 7.2 million shares were exercisable at
prices ranging from $2.03 to $21.63 per share. The Company adopted a new
employee stock option plan subsequent to year-end which authorized the issuance
of no more than five million common shares. Total options authorized and
non-distributed Stock option transactions for 1999, 1998 and 1997 were (shares
in thousands) as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1999 1998
---------------------------------------- ------------------------------------------
SHARES OPTION PRICE SHARES OPTION PRICE
--------------- ---------------- ------------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 18,679 $ 2.03 - 21.63 14,015 $ 2.03 - 21.63
Granted 3,046 2.03 - 22.94 7,319 2.03 - 17.50
Exercised (3,375) 2.03 - 18.88 (995) 2.03 - 9.38
Canceled or expired (893) 2.03 - 19.00 (1,568) 2.03 - 19.00
Other, contingent share issuance (50) 2.03 - 5.66 (92) 2.03 - 5.66
--------------- ---------------- ------------ --------------
Outstanding at end of period 17,407 $ 2.03 - 22.94 18,679 $ 2.03 - 21.63
=============== ================ ============ ==============
Exercisable at end of period 7,234 $ 2.03 - 21.63 4,394 $ 2.03 - 21.63
=============== ================ ============ ==============
Weighted average fair value of
Options granted during the period
At market $ 10.71 $ 5.77
================ ==============
Weighted average fair value of
Options granted during the period
At below market $ 13.32 $ 7.35
================ ==============
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997
------------------------------------
SHARES OPTION PRICE
------------ --------------
<S> <C> <C>
Outstanding at beginning of period 13,920 $ 2.03 - 18.75
Granted 2,284 2.03 - 21.63
Exercised (1,469) 2.03 - 9.38
Canceled or expired (629) 2.03 - 18.75
Other, contingent share issuance (91) 2.03 - 5.66
------------ --------------
Outstanding at end of period 14,015 $ 2.03 - 21.63
============ ==============
Exercisable at end of period 2,861 $ 2.03 - 18.75
============ ==============
Weighted average fair value of
Options granted during the period
At market $ 11.14
==============
Weighted average fair value of
Options granted during the period
At below market $ 14.63
==============
</TABLE>
Pursuant to terms of the Illinova acquisition, certain vesting requirements
on outstanding options were accelerated and the option shares and strike prices
were subject to the exchange ratios described in the merger documents.
Additionally, Dynegy instituted new option plans on the effective date of the
merger. At the effective date of the merger, the following shares were
exercisable at the designated prices pursuant to Dynegy's option plans.
<TABLE>
<CAPTION>
<S> <C> <C>
Exercisable at effective date 8,341 $ 2.94 - 31.35
========== ==============
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model, with the following
weighted-average assumptions used for grants in 1999, 1998 and 1997: dividends
per year of $0.05 per annum for all years; expected volatility of 40.3 percent,
40.1 percent and 42.0 percent, respectively; risk-free interest rate of 6.42
percent, 6.28 percent and 6.28 percent, respectively; and an expected life of 10
years for all periods. The Company accounts for its stock option plan in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". Had compensation cost been determined consistent
F-26
<PAGE> 86
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
with SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
the Company's net income (loss) and per share amounts would have approximated
the following pro forma amounts for the years ended December 31, 1999, 1998 and
1997, respectively.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ---------------------------
DILUTED LOSS DILUTED
NET INCOME EPS NET LOSS PER SHARE NET INCOME EPS
------------- ------------- ------------- ------------- ------------ ------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Pro forma amounts $ 142,838 $ 0.86 $ 104,578 $ 0.63 $ (108,007) $ (0.72)
============= ============= ============= ============= ============ ============
</TABLE>
NOTE 11 -- BUSINESS COMBINATIONS AND SIGNIFICANT RESTRUCTURINGS
THE DESTEC ACQUISITION. On June 27, 1997, Dynegy acquired Destec
Energy, Inc. ("Destec"), an independent power producer, for $1.26 billion, or
$21.65 per share of Destec common stock. Dynegy financed the transaction through
cash on hand and advances on its credit facilities provided by its existing
commercial banks. Concurrent with this acquisition, Dynegy sold Destec's
international facilities and operations to The AES Corporation ("AES") for $439
million. Also during 1997, the Company sold certain non-strategic assets
acquired in the purchase for aggregate proceeds of $296 million. Proceeds from
the AES and non-strategic asset sales were used to retire indebtedness.
The Destec acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price of approximately $718 million,
inclusive of transaction costs and net of cash acquired, was allocated to the
Destec assets acquired and liabilities assumed based on their estimated fair
values as of June 30, 1997, the effective date of the acquisition for accounting
purposes. The results of operations of the acquired Destec assets are
consolidated with Dynegy's existing operations beginning July 1, 1997. The
following table reflects certain unaudited pro forma information for the year
ended December 31, 1997 as if the Destec acquisition had occurred on January 1,
1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1997
------------
<S> <C>
Pro forma revenues $ 13,498,207
Pro forma net loss (101,175)
Pro forma loss per share (0.67)
</TABLE>
RESTRUCTURING OF NOVAGAS CLEARINGHOUSE, LTD. In June 1997, the Company
and NOVA Corporation ("NOVA") completed the restructuring of the companies'
Canadian natural gas operations formerly executed through Novagas Clearinghouse,
Ltd., Novagas Clearinghouse Limited Partnership and Novagas Clearinghouse
Pipelines Limited Partnership (collectively "NCL"), a joint venture between
Dynegy and NOVA. Pursuant to the agreements, Dynegy Canada Inc. ("DCI"), a
wholly owned indirect subsidiary of Dynegy, acquired NCL's natural gas marketing
business, excluding the natural gas aggregation business of Pan-Alberta Gas Ltd.
("Pan-Alberta"), from NCL and sold its aggregate 49.9 percent interest in NCL to
NOVA Gas International ("NGI"), a subsidiary of NOVA. NOVA assumed full
ownership of NCL's gathering and processing business and the operations of
Pan-Alberta. The restructuring included amendments to or termination of various
agreements between NCL, Dynegy, NOVA and certain affiliates of both Dynegy and
NOVA. Dynegy realized a pretax gain on the sale of its interest in NCL of $7.8
million, which is classified as other income in the accompanying consolidated
statements of operations for the year ended December 31, 1997. The acquisition
by Dynegy of NCL's marketing business was accounted for under the purchase
method of accounting. Accordingly, the purchase price of $4.0 million, inclusive
of transaction costs, was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as of April 1, 1997, the effective
date of the acquisition for accounting purposes.
F-27
<PAGE> 87
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESTRUCTURING OF ACCORD ENERGY LIMITED ("ACCORD"). In early 1997,
British Gas completed a restructuring whereby Centrica plc ("Centrica") was
demerged from British Gas and British Gas was renamed BG plc ("BG"). Centrica
became the Company's joint venture partner in Accord. BG holds the approximate
26 percent stake in Dynegy's common stock formerly held by British Gas. On May
2, 1997, Centrica and the Company completed a restructuring of Accord by
converting certain common stock interests in Accord to participating preferred
stock interests as of an effective date of January 1, 1997. Centrica and the
Company own 75 percent and 25 percent, respectively, of the outstanding
participating preferred stock shares of Accord. The participating preferred
stock has (a) the right to receive cumulative dividends on a priority basis to
other corporate distributions by Accord, and (b) limited voting rights. In
addition, Centrica has an option to purchase the Company's participating
preferred stock interest at any time after July 1, 2000, at a formula based
price, as defined in the agreement. As part of the reorganization, Centrica will
operate Accord while Dynegy obtained the right to market natural gas, gas
liquids and crude oil in the United Kingdom, which occurs through its wholly
owned subsidiary Dynegy UK Limited ("Dynegy UK"). No gain or loss was recognized
as a result of this restructuring and Dynegy's investment in Accord continues to
be accounted for under the equity method.
NOTE 12 -- IMPAIRMENT, ABANDONMENT AND OTHER CHARGES
During the fourth quarter of 1997, the Company recognized a $275
million charge principally related to impairment of certain long-lived assets,
abandonment of certain operating assets and reserves for obsolescence,
contingencies and other obligations. The charge primarily resulted from the
completion of a plan of restructuring of the Company's natural gas liquids and
crude oil businesses, which includes rationalization and consolidation of assets
acquired in both the Trident and Chevron Combinations, and the pursuit of a
joint venture partner in order to achieve critical mass in its crude oil
marketing business. In addition, a company-wide reorganization of reporting
responsibilities and improvements in business processes and computer information
systems resulted in the identification during the fourth quarter of 1997 of
other obsolete assets and a reduction of employees involved in non-strategic
operations.
The charge, which was substantially non-cash in nature, consisted of the
following (in thousands):
<TABLE>
<S> <C>
Abandonment of long-lived operating assets $ 154,984
Impairment of operating assets and intangibles 79,550
Inventory obsolescence reserve and write-off 10,340
Write-off of other obsolete assets 12,011
Contingency and other obligation reserves 16,750
Severance charge 1,365
------------
$ 275,000
============
</TABLE>
The fair values of the assets impaired and abandoned were determined
using a discounted cash flow methodology. During 1998, Management substantially
completed its plan of rationalization, reorganization and abandonment of assets
anticipated at the end of 1997. In addition, pursuant to the execution of the
restructuring plan, a charge of $9.6 million related to severance charges was
recognized in the first quarter of 1998. The severance charge was related to the
termination of approximately 200 corporate and field employees. The charge
recognized in the first quarter of 1998 approximated the actual severance
expenditures.
Also during the fourth quarter of 1997, the Company changed its method
for accounting for certain business process re-engineering and information
technology transformation costs pursuant to a consensus reached in November 1997
by the EITF. The EITF concluded that all re-engineering costs, including those
incurred in connection with a software installation, should be expensed as
incurred. The Company had previously capitalized certain re-engineering costs
and was amortizing such costs over the estimated useful lives of the projects.
The cumulative effect of this change in accounting of $14.8 million, net of tax,
represented the one-time charge for the aggregate unamortized re-engineering
costs previously capitalized.
F-28
<PAGE> 88
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999, 1998 and 1997, Dynegy
recognized aggregate costs related to these employee compensation plans of $24.9
million, $12.9 million and $9.7 million, respectively.
PENSION PLAN. Through a business acquisition, the Company acquired a
noncontributory defined benefit pension plan and such plan remains in existence
at December 31, 1999. The Trident NGL, Inc. Retirement Plan ("Retirement Plan")
is a qualified plan under the Internal Revenue Service regulations. The
Retirement Plan is closed to new participants. Benefits are based on years of
service and final average pay, as defined in the Retirement Plan document.
Contributions to the Retirement Plan in 1999 and 1998 represent the minimum
amount required by federal law and regulation. The Retirement Plan's funded
status and amount recognized in Dynegy's balance sheet at December 31, 1999 and
1998, were:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
($ IN THOUSANDS)
<S> <C> <C>
Projected benefit obligation, beginning of the year $ 11,755 $ 9,378
Service cost 545 665
Interest cost 718 722
Curtailment (1,940) --
Actuarial (gain) loss (1,102) 1,137
Benefits paid (216) (147)
------------ ------------
Projected benefit obligation, end of the year $ 9,760 $ 11,755
============ ============
Fair value of plan assets, beginning of the year $ 9,345 $ 8,480
Actual return on plan assets 1,125 615
Employer contributions 41 397
Benefits paid (216) (147)
------------ ------------
Fair value of plan assets, end of the year $ 10,295 $ 9,345
============ ============
Funded status $ (534) $ 2,410
Unrecognized net gain from past experience different from that assumed 4,995 3,668
------------ ------------
Pension liability $ 4,461 $ 6,078
============ ============
</TABLE>
Current year pension expense is based on measurements of the projected
benefit obligation and the market related value of the Retirement Plan assets as
of the end of the year. The projected benefit obligation at December 31, 1999
and 1998, was based on a discount rate of 7.5 and 7.0 percent, and an average
long-term rate of
F-29
<PAGE> 89
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
compensation growth of 3.5 percent, respectively. The expected long-term rate of
return on the Retirement Plan assets was estimated at 8.0 percent in 1999 and
1998.
The components of net pension expense for the Retirement Plan were:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998
------------ ------------
($ IN THOUSANDS)
<S> <C> <C>
Service cost benefits earned during period $ 545 $ 665
Interest cost on projected benefit obligation 718 722
Expected return on plan assets (717) (618)
Amortization of unrecognized gain (182) (218)
------------ ------------
Net periodic pension cost $ 364 $ 551
============ ============
</TABLE>
NOTE 14 -- RELATED PARTY TRANSACTIONS
Transactions between the Company and Chevron result principally from
the ancillary agreements entered into as part of the Chevron Combination.
Transactions with Chevron and transactions between Dynegy, NOVA and BG result
from purchases and sales of natural gas, natural gas liquids and crude oil
between subsidiaries of Dynegy and these companies. It is management's opinion
that these transactions are executed at prevailing market rates. During the
years ended December 31, 1999, 1998 and 1997, the Company recognized in its
statement of operations aggregate sales to, and aggregate costs from, these
significant shareholders of $1.1 billion and $2.0 billion, $888 million and $1.7
billion, and $788.9 million and $2.4 billion, respectively. Pursuant to the
terms of the Illinova acquisition, NOVA and BG reduced their respective stakes
in Dynegy to less than 5 percent.
NOTE 15 -- SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" and
has restated its segment disclosures for all reporting periods. Dynegy's
operations are divided into two reportable segments: Energy Convergence and
Midstream. The Energy Convergence segment is actively engaged in value creation
through marketing and trading of natural gas, power and coal and the generation
of electricity principally under the name Dynegy Marketing and Trade. The
Midstream segment consists of the North American midstream liquids operations,
as well as the international liquefied petroleum gas transportation and natural
gas liquids marketing operations located in Houston and London, and certain
other businesses. The North American midstream liquids operations are actively
engaged in the gathering and processing of natural gas and the transportation,
fractionation and storage of NGLs. This segment operates principally under the
name Dynegy Midstream Services. Generally, Dynegy accounts for intercompany
transactions at prevailing market rates. Operating segment information for 1999,
1998 and 1997 is presented below.
F-30
<PAGE> 90
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DYNEGY'S SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ENERGY
CONVERGENCE MIDSTREAM ELIMINATION TOTAL
------------ ------------ ------------ ------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic $ 9,855,757 $ 3,143,085 $ -- $ 12,998,842
Canadian 1,445,779 9,795 -- 1,455,574
United Kingdom 975,560 -- -- 975,560
------------ ------------ ------------ ------------
12,277,096 3,152,880 -- 15,429,976
------------ ------------ ------------ ------------
Intersegment revenues
Domestic 355,340 239,848 (595,188) --
Canadian 58,663 8,517 (67,180) --
United Kingdom -- -- -- --
------------ ------------ ------------ ------------
414,003 248,365 (662,368) --
------------ ------------ ------------ ------------
Total revenues 12,691,099 3,401,245 (662,368) 15,429,976
------------ ------------ ------------ ------------
Operating margin 283,594 260,281 -- 543,875
Depreciation and amortization (35,116) (94,342) -- (129,458)
Interest expense (36,433) (41,731) -- (78,164)
Interest and other income 57,453 15,834 -- 73,287
Equity earnings of unconsolidated affiliates 62,185 17,669 -- 79,854
Income tax (provision) benefit (58,098) (16,579) -- (74,677)
Net income from operations 106,631 45,218 -- 151,849
Cumulative effect of change in accounting principle -- -- -- --
Net income 106,631 45,218 -- 151,849
Identifiable assets:
Domestic $ 3,465,730 $ 2,549,773 $ -- $ 6,015,503
Canadian 266,338 68,107 -- 334,445
United Kingdom 175,223 -- -- 175,223
Investment in unconsolidated affiliates 458,552 168,783 -- 627,335
Capital expenditures 356,506 92,016 -- 448,522
</TABLE>
F-31
<PAGE> 91
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DYNEGY'S SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ENERGY
CONVERGENCE MIDSTREAM ELIMINATION TOTAL
------------ ------------ ------------ ------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic $ 9,149,299 $ 3,307,320 $ -- $ 12,456,619
Canadian 969,853 209,830 -- 1,179,683
United Kingdom 621,695 -- -- 621,695
------------ ------------ ------------ ------------
10,740,847 3,517,150 -- 14,257,997
------------ ------------ ------------ ------------
Intersegment revenues
Domestic 157,492 250,280 (407,772) --
Canadian 61,223 -- (61,223) --
United Kingdom -- -- -- --
------------ ------------ ------------ ------------
218,715 250,280 (468,995) --
------------ ------------ ------------ ------------
Total revenues 10,959,562 3,767,430 (468,995) 14,257,997
------------ ------------ ------------ ------------
Operating margin 236,275 192,412 -- 428,687
Depreciation and amortization (29,026) (84,176) -- (113,202)
Interest expense (24,944) (50,048) -- (74,992)
Interest and other income 6,763 40,058 -- 46,821
Equity earnings of unconsolidated affiliates 75,242 15,796 -- 91,038
Income tax (provision) benefit (52,262) 1,924 -- (50,338)
Net income from operations 90,750 17,603 -- 108,353
Net income 90,750 17,603 -- 108,353
Identifiable assets:
Domestic $ 2,838,367 $ 2,036,795 $ -- $ 4,875,162
Canadian 257,070 6,947 -- 264,017
United Kingdom 125,058 -- -- 125,058
Investment in unconsolidated affiliates 343,819 158,794 -- 502,613
Capital expenditures 359,516 118,948 -- 478,464
</TABLE>
F-32
<PAGE> 92
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DYNEGY'S SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ENERGY
CONVERGENCE MIDSTREAM ELIMINATION TOTAL
------------ ------------ ------------ ------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic $ 8,070,692 $ 4,205,759 $ -- $ 12,276,451
Canadian 632,411 264,028 -- 896,439
United Kingdom 205,490 -- -- 205,490
------------ ------------ ------------ ------------
8,908,593 4,469,787 -- 13,378,380
------------ ------------ ------------ ------------
Intersegment revenues
Domestic 83,944 437,567 (521,511) --
Canadian 30,580 -- (30,580) --
United Kingdom 1,314 -- (1,314) --
------------ ------------ ------------ ------------
115,838 437,567 (553,405) --
------------ ------------ ------------ ------------
Total revenues 9,024,431 4,907,354 (553,405) 13,378,380
------------ ------------ ------------ ------------
Operating margin 126,805 258,489 -- 385,294
Impairment, abandonment and other charges (20,228) (254,772) -- (275,000)
Depreciation and amortization (16,425) (87,966) -- (104,391)
Interest expense (12,214) (51,241) -- (63,455)
Interest and other income 13,209 14,904 -- 28,113
Equity earnings of unconsolidated affiliates 36,241 22,718 -- 58,959
Income tax (provision) benefit (8,710) 70,920 -- 62,210
Net income (loss) from operations 24,321 (112,006) -- (87,685)
Cumulative effect of change in accounting (7,289) (7,511) -- (14,800)
principle
Net income (loss) 17,033 (119,518) -- (102,485)
Identifiable assets:
Domestic $ 1,882,965 $ 2,299,312 $ -- $ 4,182,277
Canadian 239,090 40,900 -- 279,990
United Kingdom 54,635 -- -- 54,635
Investment in unconsolidated affiliates 310,445 160,032 -- 470,477
Capital expenditures 815,271 189,388 -- 1,004,659
</TABLE>
F-33
<PAGE> 93
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, 1999 and 1998.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
1999 1999 1999 1999
---------- ---------- ---------- ----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues $3,044,973 $3,160,757 $4,584,929 $4,639,317
Operating margin 120,077 125,747 158,814 139,237
Income before income taxes 40,683 41,510 75,434 68,899
Net income 28,071 27,976 50,692 45,110
Net income per share 0.17 0.17 0.30 0.26
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
1998 1998 1998 1998
---------- ---------- ---------- ----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues $3,315,569 $3,278,214 $4,586,515 $3,077,699
Operating margin 96,989 107,915 105,985 117,798
Income (loss) before income taxes 16,411 35,043 63,739 43,498
Net income (loss) 12,339 23,441 43,645 28,928
Net income (loss) per share (1) 0.07 0.14 0.27 0.18
</TABLE>
1. Net income (loss) per share amounts have been restated to conform to the
provisions of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share."
NOTE 17 - SUBSEQUENT EVENTS
ILLINOVA ACQUISITION. Dynegy completed its acquisition of Illinova
early in the first quarter 2000. The merger of Dynegy and Illinova involved the
creation of a new holding company, now known as Dynegy Inc., and two separate
but concurrent mergers. In one concurrent merger, a wholly-owned subsidiary of
Dynegy Inc. merged with and into Illinova. In the other concurrent merger, a
second wholly-owned subsidiary of Dynegy Inc. merged with and into old Dynegy.
As a result of these two concurrent mergers, Illinova and old Dynegy continue to
exist as wholly-owned subsidiaries of Dynegy Inc., and are referred to as
Illinova Holding and Dynegy Holding, respectively. Dynegy accounted for the
merger as a purchase of Illinova. This accounting treatment is based on various
factors present in the merger, including the majority ownership (and voting
control) of Dynegy's shareholders following the merger, the role of Dynegy's
management following the merger (including the service of C.L. Watson as
Chairman and Chief Executive Officer) and the influence of Chevron because of
the size of its ownership interest and its rights
F-34
<PAGE> 94
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
under the shareholder agreement, articles of incorporation and bylaws. As a
result, the consolidated financial statements of Dynegy after the merger will
reflect the assets and liabilities of Dynegy Holding at historical book values
and the assets and liabilities of Illinova at allocated fair values. For
accounting purposes, the effective date of the merger will be January 1, 2000.
This date was selected as a result of the following factors:
o Affirmative consent had been acquired from both shareholder groups prior to
January 1, 2000,
o All regulatory consents had been acquired prior to January 1, 2000,
o Material terms of the purchase and sale agreement for the qualifying
facilities, a condition precedent to the closing, had been negotiated on or
about January 1, 2000, and
o Board, executive, commercial, financial and regulatory oversight of
Illinova's operations had transferred to Dynegy on or about January 1,
2000.
In the combination, Dynegy shareholders, other than Chevron U.S.A. Inc.
("Chevron"), NOVA Gas Services (U.S.) Inc. ("NOVA") and BG Holdings, Inc.,
elected to exchange each Dynegy share for 0.69 of a share of Dynegy Class A
common stock, based on a fixed exchange ratio, or elected to receive $16.50 per
share in cash consideration, subject to proration. NOVA and BG Holdings, Inc.
elected cash and thereby reduced their respective ownership in Dynegy as part of
this combination. Therefore, instead of receiving Dynegy Class A common stock in
exchange for their respective shares of Dynegy Holding common stock, NOVA and
the parent of BG Holdings, Inc. each received a combination of cash, subject to
proration, and shares of Dynegy Series A Convertible Preferred Stock. Chevron
received shares of Dynegy Class B common stock in exchange for all of its shares
of Dynegy Holding common stock and Series A Preferred, respectively.
Additionally, as part of the combination, Chevron purchased $200 million of
additional Dynegy Class B common stock. Each share of Illinova common stock was
converted into one share of Dynegy Class A common stock. Immediately after the
combination, former Dynegy shareholders owned approximately 51 percent of the
outstanding shares of Dynegy.
Approximately 60 percent of the consideration received by existing
Dynegy shareholders was in the form of Dynegy stock and 40 percent was cash. In
aggregate, the cash portion of the consideration approximated $1.07 billion.
Dynegy financed the cash component of the merger initially with borrowings under
a debt facility and the issuance of $200 million of Class B common stock to
Chevron. Dynegy anticipates repaying or refinancing a significant portion of the
debt facility with proceeds from an offering of equity securities, additional
public debt issuances, proceeds from asset sales and cash flow from operations.
ASSET DISPOSITIONS. In early 2000, the Company entered into agreements
to dispose of certain assets for aggregate net proceeds approximating $560
million. In addition, the Company has stated its intent to dispose of its
domestic crude oil marketing operations, likely in the first quarter 2000. These
transactions result from statutory requirements pursuant to the acquisition of
Illinova or for the purpose of eliminating operating assets considered
non-strategic or which were under-performing in comparison to other assets in
the portfolio. The net proceeds received in these transactions are being used to
retire merger-related debt or are being re-deployed into the Company's capital
investment program. The financial impact of these transactions in the aggregate
is not expected to be material to Dynegy's results of operations or financial
position for the year ended December 31, 2000. Further, disposition of these
assets is not expected to have a material adverse effect on Dynegy's prospective
competitive position in the businesses in which it operates. The assets sold
consist of nine cogeneration facilities designated as qualifying facilities
under PURPA law and substantially all of the Company's natural gas processing
facilities and related infrastructure in the Mid-Continent region.
F-35
<PAGE> 95
SCHEDULE I
DYNEGY INC.
CONDENSED BALANCE SHEETS OF REGISTRANT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ -- $ 209,439
Accounts receivable 3,209 500
Intercompany accounts receivable 709,119 446,959
Prepayments and other assets 9,471 6,773
------------ ------------
721,799 663,671
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 3,246 3,297
Less: accumulated depreciation (2,825) (2,587)
------------ ------------
421 710
------------ ------------
OTHER ASSETS
Investments in affiliates 1,763,922 1,514,635
Intercompany note receivable 500,590 343,311
Deferred taxes and other assets 30,308 22,225
------------ ------------
$ 3,017,040 $ 2,544,552
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Intercompany accounts payable $ -- $ 155,131
Accrued liabilities 126,546 146,100
------------ ------------
126,546 301,231
LONG-TERM DEBT 1,299,333 913,000
COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST 200,000 200,000
OTHER LIABILITIES 81,679 2,258
------------ ------------
1,707,558 1,416,489
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 50,000,000 shares Authorized: 8,000,000
shares designated as Series A Participating Preferred Stock, 7,815,363
shares issued and
Outstanding at December 31, 1999 and 1998 75,418 75,418
Common stock, $0.01 par value, 400,000,000 shares
Authorized: 157,499,001 shares issued at December 31, 1999,
and 153,298,220 shares issued at December 31, 1998 1,575 1,533
Additional paid-in capital 973,000 935,183
Retained earnings 277,074 133,340
Less: treasury stock, at cost: 1,200,700 shares at December 31, 1999
1,200,700 shares at December 31, 1998 (17,585) (17,411)
------------ ------------
1,309,482 1,128,063
------------ ------------
$ 3,017,040 $ 2,544,552
============ ============
</TABLE>
See Note to Registrant's Financial Statements.
F-36
<PAGE> 96
SCHEDULE I
DYNEGY INC.
STATEMENTS OF OPERATIONS OF THE REGISTRANT
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Depreciation and amortization $ (238) $ (241) $ (1,292)
Impairment, abandonment and other charges -- (959) (3,886)
------------ ------------ ------------
Operating loss (238) (1,200) (5,178)
Equity in earnings of affiliates 249,287 215,928 (115,108)
Intercompany interest and other income 65,325 13,667 16,928
Interest expense (82,825) (68,403) (45,790)
Other expenses (5,023) (1,301) (747)
------------ ------------ ------------
Income (loss) before income taxes 226,526 158,691 (149,895)
Income tax provision (benefit) 74,677 50,338 (62,210)
------------ ------------ ------------
Net income (loss) from continuing operations before
cumulative effect of change in accounting 151,849 108,353 (87,685)
Cumulative effect of change in accounting principle
(net of income tax benefit of $7,913) -- -- (14,800)
------------ ------------ ------------
NET INCOME (LOSS) $ 151,849 $ 108,353 $ (102,485)
============ ============ ============
</TABLE>
See Note to Registrant's Financial Statements.
F-37
<PAGE> 97
SCHEDULE I
DYNEGY INC.
STATEMENTS OF CASH FLOWS OF THE REGISTRANT
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 151,849 $ 108,353 $ (102,485)
Items not affecting cash flows from operating activities:
Depreciation and amortization 238 1,864 9,631
Equity in earnings of affiliates, net of cash distributions (249,287) (215,928) 115,108
Deferred taxes 63,167 50,338 (86,424)
Other -- -- 12,344
Change in assets and liabilities resulting from operating activities:
Accounts receivable (2,709) (468) 76
Intercompany transactions (574,518) 239,586 636,063
Prepayments and other assets (2,698) (2,212) (2,749)
Accrued liabilities 8,939 3,693 1,529
Other, net 25,043 (29,778) 2,493
------------ ------------ ------------
Net cash used in operating activities (579,976) 155,448 585,586
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures -- -- (5,121)
Acquisitions -- (2,644) (785,349)
Other -- -- --
------------ ------------ ------------
Net cash used in investing activities -- (2,644) (790,470)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 397,488 212,259 2,218,500
Repayments of long-term borrowings -- (493,277) (2,198,000)
Net proceeds from commercial paper and money market lines of credit (42,161) 350,758 --
Intercompany advances -- -- --
Proceeds from sale of capital stock, options and warrants 21,855 3,863 203,190
Treasury stock acquisitions (174) (6,905) (10,506)
Capital contributions -- -- --
Dividends and other distributions (8,115) (7,988) (7,925)
Other financing 1,644 (2,450) --
------------ ------------ ------------
Net cash provided by financing activities 370,537 56,260 205,259
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (209,439) 209,064 375
Cash and cash equivalents, beginning of period 209,439 375 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ -- $ 209,439 $ 375
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid (net of amount capitalized) $ 97,540 $ 100,589 $ 60,323
============ ============ ============
Taxes paid (net of refunds) $ 1,927 $ (8,000) $ 8,043
============ ============ ============
Cash dividends paid to parent by consolidated or
unconsolidated subsidiaries $ -- $ -- $ --
============ ============ ============
</TABLE>
See Note to Registrant's Financial Statements.
F-38
<PAGE> 98
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, 1999 and 1998, and for the years
then ended through December 31, 1999, respectively. These statements should be
read in conjunction with the Consolidated Statements and notes thereto of Dynegy
Inc.
F-39
<PAGE> 99
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
2.1 - Agreement and Plan of Merger among Dynegy Inc., Illinova Corporation and certain other
parties named therein (15)
2.2 - Amendment to Agreement and Plan of Merger among Dynegy Inc., Illinova Corporation and
other parties named therein (18)
2.3 - Combination Agreement and Plan of Merger, dated May, 22, 1996, by and between NGC
Corporation, Chevron U.S.A. Inc. and Midstream Combination Corp.(7)
2.4 - Amendment to Combination Agreement, dated as of August 29, 1996, by and among NGC
Corporation, Chevron U.S.A. Inc. and Midstream Combination Corp.(5)
2.5 - Agreement and Plan of Merger by and among Destec Energy, Inc., The Dow Chemical Company, NGC
Corporation and NGC Acquisition Corporation II dated as of February 17, 1997. (8)
2.6 - Asset Purchase Agreement by and between NGC Corporation and The AES Corporation dated as of
February 17, 1997. (8)
2.7 - First Amendment to Asset Purchase Agreement by and between NGC Corporation and The AES
Corporation dated June 29, 1997.(9)
2.8 - Asset Purchase Agreement between Destec Energy, Inc. and ECT EOCENE Enterprises, Inc. dated
July 1, 1997.(9)
3.1 - Articles of Incorporation of the Company (18)
3.2 - Articles of Amendment to the Company's Articles of Incorporation (18)
3.3 - Articles of Amendment to the Company's Articles of Incorporation (19)
+3.4 - Amended and Restated Bylaws of Dynegy Inc.
3.5 - Statement of Resolution Establishing Series of Series A Convertible Preferred Stock
filed with the Illinois Secretary of State on February 1, 2000. (19)
4.1 - Warrant exercisable for 6,228 shares of Common Stock of NGC Corporation registered in the
name of J. Otis Winters. (2)
4.2 - Indenture, dated as of December 11, 1995, by and between NGC Corporation, the Subsidiary
Guarantors named therein and the First National Bank of Chicago, as Trustee.(4)
4.3 - First Supplemental Indenture, dated as of August 31, 1996, by and among NGC Corporation, the
Subsidiary Guarantors named therein, and The First National Bank of Chicago, as Trustee,
supplementing and amending the Indenture dated as of December 11, 1995. (5)
4.4 - Second Supplemental Indenture, dated as of October 11, 1996, by and among NGC Corporation,
the Subsidiary Guarantors named therein, and The First National Bank of Chicago, as Trustee,
supplementing and amending the Indenture dated as of December 11, 1995. (5)
4.5 - Amended and Restated Credit Agreement dated as of June 27, 1997, among NGC Corporation and
The First National Bank of Chicago, Individually and as Agent, The Chase Manhattan Bank and
NationsBank of Texas, N.A., Individually and as Co-Agents, and the Lenders Named therein.(9)
4.6 - First Amendment to Amended and Restated Credit Agreement, dated November 24, 1997, among
NGC Corporation and The First National Bank of Chicago, Individually and as Agent, The Chase
Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents for the Lenders
named therein. (13)
4.7 - Second Amendment to Amended and Restated Credit Agreement, dated as of February 20, 1998,
among NGC Corporation and The First National Bank of Chicago, Individually and as Agent, The
Chase Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents for the
Lenders named therein. (13)
4.8 - Subordinated Debenture Indenture between NGC Corporation and The First National Bank of
Chicago, as Debenture Trustee, dated as of May 28, 1997. (10)
4.9 - Amended and Restated Declaration of Trust among NGC Corporation, Wilmington Trust Company, as
Property Trustee and Delaware Trustee, and the Administrative Trustees named therein, dated
as of May 28, 1997. (10)
4.10 - Series A Capital Securities Guarantee executed by NGC Corporation and The First National Bank
of Chicago, as Guarantee Trustee, dated as of May 28, 1997. (10)
</TABLE>
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
4.11 - Common Securities Guarantee of NGC Corporation dated as of May 28, 1997. (10)
4.12 - Registration Rights Agreement, dated as of May 28, 1997, among NGC Corporation, NGC
Corporation Capital Trust I, Lehman Brothers, Salomon Brothers Inc. and Smith Barney Inc. (10)
4.13 - Second Supplemental Indenture among NGC Corporation, Destec Energy, Inc. and The First
National Bank of Chicago, as Trustee, dated as of June 30, 1997, supplementing and amending
the Indenture dated as of June 30, 1997. (11)
4.14 - Fourth Supplemental Indenture among NGC Corporation, Destec Energy, Inc. and The First
National Bank of Chicago, as Trustee, dated as of June 30, 1997, supplementing and amending
the Indenture dated as of December 11, 1995. (11)
4.15 - Fifth Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein
and The First National Bank of Chicago, as Trustee, dated as of September 30, 1997,
supplementing and amending the Indenture dated as of December 11, 1995. (13)
4.16 - Sixth Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein
and The First National Bank of Chicago, as Trustee, dated as of January 5, 1998,
supplementing and amending the Indenture dated as of December 11, 1995. (13)
4.17 - Seventh Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein
and The First National Bank of Chicago, as Trustee, dated as of February 20, 1998,
supplementing and amending the Indenture dated as of December 11, 1995. (13)
4.18 - Indenture, dated as of September 26, 1996, restated as of March 23, 1998, to include
amendments in the First through Fifth Supplemental Indentures, between NGC Corporation and
The First National Bank of Chicago, as Trustee. (13)
4.19 - Credit Agreement dated as of May 27, 1998, among NGC Corporation and The First National Bank
of Chicago, Individually and as Administrative Agent, The Chase Manhattan Bank, Individually
and as Syndication agent and NationsBank, N.A., Individually and as Documentation Agent and
the Lenders named therein. (12)
4.20 - 364-Day Revolving Credit Agreement dated as of May 27, 1998, among NGC Corporation and The
First National Bank of Chicago, Individually and as Administrative Agent, The Chase Manhattan
Bank, Individually and as Syndication agent and NationsBank, N.A., Individually and as
Documentation Agent and the Lenders named therein. (12)
4.21 - First Amendment to 364-Day Revolving Credit dated as of May 5, 1999 among Dynegy Inc. and
The First National Bank of Chicago, Individually and as Administrative Agent, The Chase
Manhattan Bank, Individually and as Syndication Agent, and Citibank N.A., Individually and as
Documentation Agent and the Lenders Named therein. (17)
10.1 - Agreement of Sale and Purchase of Assets, dated as of May 5, 1991, as amended on June 6,
1991 and August 30, 1991, by and between OXY USA Inc. and Trident Energy, Inc. (1)
10.2 - Master Agreement on Gas Processing, dated as of May 5, 1991, by and between OXY USA Inc. and
Trident NGL, Inc.(1)
10.3 - Dynegy Inc. Amended and Restated 1991 Stock Option Plan. (16)
10.4 - Dynegy Inc. 1998 U.K. Stock Option Plan (16)
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
10.5 - Dynegy Inc. Amended and Restated Employee Equity Option Plan. (16)
+10.6 - Dynegy Inc. 1999 Long Term Incentive Plan.
+10.7 - Dynegy 2000 Long Term Incentive Plan.
10.8 - Employment Agreement dated April 2, 1996 by and between NGC Corporation and Stephen A.
Furbacher.(6)
+10.9 - Employment Agreement, effective February 1, 2000, between Charles L. Watson and Dynegy Inc.
+10.10 - Employment Agreement, effective February 1, 2000, between Stephen W. Bergstrom and Dynegy
Inc.
+10.11 - Employment Agreement, effective February 1, 2000, between John U. Clarke and Dynegy Inc.
+10.12 - Employment Agreement, effective February 1, 2000, between Kenneth E. Randolph and Dynegy Inc.
10.13 - Employment Agreement, dated as of July 1, 1997, by and between Dan Ryser and NGC Corporation.
10.14 - Lease Agreement entered into on June 12, 1996 between Metropolitan Life Insurance Company and
Metropolitan Tower Realty Company, Inc., as landlord, and NGC Corporation, as tenant. (6)
10.15 - First Amendment to Lease Agreement entered into on June 12, 1996 between Metropolitan Life
Insurance Company and Metropolitan Tower Realty Company, Inc., as landlord, and NGC
Corporation, as tenant. (6)
10.16 - Contribution and Assumption Agreement, dated as of August 31, 1996, among Chevron U.S.A.
Inc., Chevron Pipe Line Company, Chevron Chemical Company and Midstream Combination Corp. (5)
10.17 - Scope of Business Agreement, dated May 22, 1996 between Chevron Corporation and NGC
Corporation. (6)
10.18 - Master Alliance Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc., Chevron
Chemical Company, Chevron Pipe Line Company, and other Chevron U.S.A. Inc. affiliates, NGC
Corporation, Natural Gas Clearinghouse, Warren Petroleum Company, Limited Partnership,
Electric Clearinghouse, Inc. and other NGC Corporation affiliates. (5)
* 10.19 - Natural Gas Purchase and Sale Agreement, dated as of August 30, 1996, among Chevron U.S.A.
Inc. and Natural Gas Clearinghouse. (5)
* 10.20 - Master Natural Gas Processing Agreement, dated as of September 1, 1996, among Chevron U.S.A.
Inc. and Warren Petroleum Company, Limited Partnership. (5)
* 10.21 - Master Natural Gas Liquids Purchase Agreement, dated as of September 1, 1996, among Warren
Petroleum Company, Limited Partnership and Chevron U.S.A. Inc. (5)
* 10.22 - Gas Supply and Service Agreement, dated as of September 1, 1996, among Chevron Products
Company and Natural Gas Clearinghouse. (5)
</TABLE>
<PAGE> 102
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
10.23 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc.
and Chevron U.S.A. Production Company. (6)
10.24 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc.
and Chevron Chemical Company. (6)
10.25 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc.
and Chevron Products Company. (6)
* 10.26 - Feedstock Sale and Refinery Product Purchase Agreements, dated as of September 1, 1996, among
Chevron Products Company and Warren Petroleum Company, Limited Partnership.(5)
* 10.27 - Refinery Product Sale Agreement (Hawaii), dated as of September 1, 1996, among Warren
Petroleum Company, Limited Partnership and Chevron Products Company. (5)
* 10.28 - Feedstock Sale and Refinery Product Master Services Agreement, dated as of September 1, 1996,
among Chevron Products Company and Warren Petroleum Company, Limited Partnership. (5)
* 10.29 - CCC Product Sale and Purchase Agreement dated as of September 1, 1996, among Warren Petroleum
Company, Limited Partnership and Chevron Chemical Company. (5)
* 10.30 - CCC/WPC Services Agreement, dated as of September 1, 1996, among Chevron Chemical Company and
Warren Petroleum Company, Limited Partnership. (5)
* 10.31 - Operating Agreement, dated as of September 1, 1996, among Warren Petroleum Company, Limited
Partnership and Chevron Pipe Line Company. (5)
10.32 - Galena Park Services Agreement, dated as of September 1, 1996, among Chevron Products Company
and Midstream Combination Corp. (5)
* 10.33 - Venice Complex Operating Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc.
and Warren Petroleum Company, Limited Partnership. (6)
* 10.34 - Time Charter, dated as of August 31, 1996, by and between Midstream Barge Company, L.L.C. and
Warren Petroleum Company, Limited Partnership. (5)
* 10.35 - Limited Liability Company Agreement of Midstream Barge Company, L.L.C., dated as of August
31, 1996, by and between Chevron U.S.A. Inc. and Warren Petroleum Company, Limited
Partnership. (5)
10.36 - Subscription Agreement between Energy Convergence Holding Company and Chevron U.S.A. Inc
(15)
10.37 - Stock Purchase Agreement between Energy Convergence Holding Company and British Gas
Atlantic Holdings BV and related Guaranty by British Gas Overseas Holdings Limited (15)
10.38 - Voting Agreement between Illinova and BG Holdings, Inc. (15)
10.39 - Voting Agreement between Illinova and NOVA Gas Services (U.S.) Inc. (15)
10.40 - Voting Agreement between Illinova and Chevron U.S.A. Inc. (15)
10.41 - Shareholder Agreement of Energy Convergence Holding Company with Chevron U.S.A. Inc. (15)
</TABLE>
<PAGE> 103
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
10.42 - Registration Rights Agreement (NOVA Gas Services (U.S.) Inc. and British Gas Atlantic
Holdings BV) (15)
10.43 - First Amended and Restated Limited Partnership Agreement of the West Texas LPG Pipeline
Limited Partnership (17)
10.44 - Amended and Restated Operating Agreement of the West Texas LPG Pipeline Limited
Partnership and Chevron Pipeline Company (17)
10.45 - Dynegy Inc. Severance Pay Plan. (16)
10.46 - Registration Rights Agreement (Chevron U.S.A. Inc) (15)
10.47 - First Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17)
10.48 - Amendment No. 1 to the First Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17)
10.49 - Second Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17)
10.50 - Third Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17)
10.51 - Fourth Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17)
10.52 - Dynegy Midstream Services, Limited Partnership Supplemental Severance Pay Plan (17)
10.53 - NGC Profit Sharing/401(k) Savings Plan. (16)
10.54 - First Amendment to NGC Profit Sharing/401(k) Savings Plan. (16)
10.55 - Second Amendment to NGC Profit Sharing/401(k) Savings Plan. (16)
10.56 - Third Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. (17)
+10.57 - Fourth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan.
+10.58 - Fifth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan.
+10.59 - Sixth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan.
+10.60 - Seventh Amendment to Dynegy Inc. 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
<PAGE> 104
* Exhibit omits certain information which the Company has filed separately
with the Commission pursuant to a confidential treatment request pursuant
to Rule 406 promulgated under the Securities Act of 1933, as amended.
(1) Incorporated by reference to exhibits to the Registration Statement of
Trident NGL, Inc. on Form S-1, Registration No. 33-43871.
(2) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended September 30, 1993 of Trident NGL Holding,
Inc., Commission File No. 1-11156.
(3) Incorporated by reference to exhibits to the Registration Statement of
Trident NGL Holding, Inc. on Form S-4, Registration No. 33-88907.
(4) Incorporated by reference to the Registration Statement of NGC Corporation
on Form S-3, Registration No. 33-97368.
(5) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended September 30, 1996, of NGC Corporation,
Commission File No. 1-11156.
(6) Incorporated by reference to exhibits to the Registration Statement of
Midstream Combination Corp. on Form S-4, Registration No. 333-09419.
(7) Incorporated by reference to exhibits to the Current Report on Form 8-K of
NGC Corporation, dated May 22, 1996, Commission File No. 1-11156.
(8) Incorporated by reference to exhibits to the Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1996, of NGC Corporation, Commission
File No. 1-11156.
(9) Incorporated by reference to exhibits to the Current Report on Form 8-K of
NGC Corporation, Commission File No. 1-11156, dated June 27, 1997.
(10) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended June 30, 1997, Commission File No. 1-11156.
(11) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended September 30, 1997, Commission File No.
1-11156
(12) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended June 30, 1998, Commission File No. 1-11156.
(13) Incorporated by reference to exhibits to the Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1997, of NGC Corporation, Commission
File No. 1-11156.
(14) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period ended September 30, 1998, Commission File No.
1-11156.
(15) Incorporated by reference to exhibits to the Current Report on Form 8-K of
Dynegy Inc. dated June 14, 1999.
(16) Incorporated by reference to exhibits to the Annual Report in Form 10-K of
the Fiscal Year Ended December 31, 1998, of Dynegy Inc., Commission File
No. 1-11156.
(17) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended June 30, 1999, Commission File No. 1-11156.
(18) Incorporated by reference to exhibits to Amendment No. 1 to the
Registration Statement on Form S-4 of Energy Convergence Holding Company
filed with the Securities and Exchange Commission on September 7, 1999.
(19) Incorporated by reference to exhibits to Registration Statement on Form 8-A
of Dynegy Inc.
(b) Reports on Form 8-K of Dynegy Inc..
None.
<PAGE> 1
EXHIBIT 3.4
AS AMENDED
FEBRUARY 2, 2000
BY RESOLUTION 2000-3
DYNEGY INC.
AMENDED AND RESTATED BYLAWS
ARTICLE I
CORPORATE OFFICES
Section 1. Illinois Registered Office. The registered office of the
corporation in the State of Illinois may, but need not, be identical with the
principal office in the State of Illinois, and the address of the registered
office may be changed from time to time by the board of directors.
Section 2. Other Offices. The principal office of the corporation in the
State of Illinois shall initially be located in the City of Decatur and County
of Macon. The corporation may also have offices at such other places both within
and without the State of Illinois as the board of directors may from time to
time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. Times and Places of Meetings. Meetings of shareholders for any
purpose may be held at such time and place, within or without the State of
Illinois, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual Meetings. Annual meetings of shareholders, commencing
with the year 2000, shall be held on the 1st of May if not a legal holiday, and
if a legal holiday, then on the next business day following, or at such other
time as may be provided in a resolution by the board of directors, for the
purpose of electing directors and for the transaction of such other business as
may properly be brought before the meeting. If the election of directors shall
not be held on the day designated herein for any annual meeting, or at any
adjournment thereof, the board of directors shall cause the election to be held
at a meeting of the shareholders as soon thereafter as conveniently may be.
Section 3. Special Meetings. Special meetings of shareholders may be called
by the chairman of the board, the chief executive officer, the president, the
board directors, or the holders of not less than one-fifth of all the
outstanding shares entitled to vote on the matter for which the meeting is
called.
<PAGE> 2
Section 4. Notice of Meetings. Written notice stating the place, day and
hour of the meeting, and in the case of a special meeting, the purpose or
purposes for which the meeting is called, shall be delivered not less than ten
nor more than sixty days before the date of the meeting, or in the case of a
merger, consolidation, share exchange, dissolution or sale, lease or exchange of
assets, not less than twenty nor more than sixty days before the date of the
meeting, either personally or by mail, by or at the direction of the chairman of
the board, chief executive officer, president or the secretary or other persons
calling the meeting, to each shareholder of record entitled to vote at such
meeting. If mailed, such notice shall be deemed to be delivered when deposited
in the United States mail addressed to the shareholder at the shareholder's
address as it appears on the records of the corporation, with postage thereon
prepaid.
Section 5. Waiver of Notice. Whenever any notice whatsoever is required to
be given under the provisions of the Business Corporation Act or the articles of
incorporation or these by-laws, a waiver thereof in writing signed by the person
or persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice. Attendance at
any meeting shall constitute waiver of notice thereof unless the person at the
meeting objects to the holding of the meeting because proper notice was not
given.
Section 6. Record Date. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders, or shareholders
entitled to receive payment of any dividend, or in order to make a determination
of shareholders for any other proper purpose, the board of directors may fix in
advance a date as the record date for any such determination of shareholders,
such date in any case to be not more than sixty days and, for a meeting of
shareholders, not less than ten days, or in the case of a merger, consolidation,
share exchange, dissolution or sale, lease or exchange of assets, not less than
twenty days, immediately preceding such meeting or other action. If no record
date is fixed for the determination of shareholders entitled to notice of or to
vote at a meeting of shareholders, or shareholders entitled to receive payment
of a dividend, the date on which notice of the meeting is mailed or the date on
which the resolution of the board of directors declaring such dividend is
adopted, as the case may be, shall be the record date for such determination of
shareholders. When a determination of shareholders entitled to vote at any
meeting of shareholders has been made as provided herein, such determination
shall apply to any adjournment thereof.
Section 7. Voting Lists. The officer or agent having charge of the transfer
books for shares of the corporation shall make, within twenty days after the
record date for a meeting of shareholders or ten days before such meeting,
whichever is earlier, a complete list of the shareholders entitled to vote at
such meeting, arranged in alphabetical order, with the address of and the number
of shares held by each, which list, for a period of ten days prior to such
meeting, shall be kept on file at the registered office of the corporation and
shall be subject to inspection by any shareholder, and to copying at the
shareholder's expense, at any time during usual business hours. Such list shall
also be produced and kept open at the time and place of the meeting and shall be
subject to the inspection of any shareholder during the whole time of the
meeting. The original share ledger or transfer book, or a duplicate thereof kept
in this State, shall be prima facie evidence as to who are the shareholders
entitled to examine such list or share ledger or transfer book or to vote at any
meeting of shareholders.
2
<PAGE> 3
Section 8. Quorum. A majority of the outstanding shares entitled to vote on
a matter, represented in person or by proxy, shall constitute a quorum for
consideration of such matter at any meeting of shareholders; provided, that if
less than a majority of such outstanding shares are represented at the meeting,
a majority of the shares so represented may adjourn the meeting from time to
time without further notice until a quorum shall attend. If a quorum is present,
the affirmative vote of the majority of such shares represented at the meeting
and entitled to vote on a matter shall be the act of the shareholders, unless
the vote of a greater number or voting by classes is required by the Business
Corporation Act, the articles of incorporation or these by-laws.
Section 9. Proxies. A shareholder may appoint a proxy to vote or otherwise
act for that shareholder by signing a proxy appointment form and delivering it
to the person so appointed. Such proxy shall be filed with the secretary of the
corporation before the time of the meeting. No proxy shall be valid after eleven
months from the date thereof, unless otherwise provided in the proxy. Every
proxy continues in full force and effect until revoked by the person executing
it prior to the vote thereon, except to the extent such proxy is irrevocable
under applicable law. Such revocation may be effected by a writing delivered to
the secretary of the corporation stating that the proxy is revoked, or by a
subsequent proxy executed by, or by attendance at the meeting and voting in
person by, the person executing the proxy. The dates contained on the forms of
proxy presumptively determine the order of execution, regardless of the postmark
dates on the envelopes in which they are mailed.
Section 10. Voting of Shares. Except as otherwise provided by the articles
of incorporation or by resolutions of the board of directors providing for the
issue of any shares of preferred or special classes in series, each outstanding
share, regardless of class, shall be entitled to one vote on each matter
submitted to a vote at a meeting of shareholders.
Section 11. Voting of Shares by Certain Holders. Shares registered in the
name of another corporation, domestic or foreign, may be voted by any officer,
agent, proxy or other legal representative authorized to vote such shares under
the law of incorporation of such corporation. The corporation may treat the
president or other person holding the position of chief executive officer of
such other corporation as authorized to vote such shares, together with any
other person indicated and any other holder of an office indicated by the
corporate shareholder to the corporation as a person or an office authorized to
vote such shares. Such persons and offices indicated shall be registered by the
corporation on the transfer books for shares and included in any voting list
prepared in accordance with the Business Corporation Act and these by-laws.
Shares registered in the name of a deceased person, a minor ward or a person
under legal disability may be voted by his administrator, executor or
court-appointed guardian, either in person or by proxy, without a transfer of
such shares into the name of such administrator, executor or court-appointed
guardian. Shares registered in the name of a trustee may be voted by such
trustee, either in person or by proxy. Shares registered in the name of a
receiver may be voted by such receiver, and shares held by or under the control
of a receiver may be voted by such receiver without the transfer thereof into
the receiver's name if authority so to do is contained in an appropriate order
of the court by which such receiver was appointed. A shareholder whose shares
are pledged shall be entitled to vote such shares until the shares have been
transferred into the name of the pledgee, and thereafter the pledgee shall be
entitled to
3
<PAGE> 4
vote the shares so transferred. Shares of the corporation owned by the
corporation shall not be voted, directly or indirectly, at any meeting and shall
not be counted in determining the total number of outstanding shares entitled to
vote at any given time, but shares of the corporation held by the corporation in
a fiduciary capacity may be voted and shall be counted in determining the total
number of outstanding shares entitled to vote at any given time.
Section 12. Inspectors. The board of directors, in advance of any meeting
of shareholders, may appoint one or more persons as inspectors to act at such
meeting or any adjournment thereof. If inspectors of election are not so
appointed, the chairman of the meeting may, or upon the request of any
shareholder shall, appoint one or more persons as inspectors for such meeting.
Such inspectors shall ascertain and report the number of shares represented at
the meeting, based upon their determination of the validity and effect of
proxies; count all votes and report the results; and do such other acts as are
proper to conduct the election and voting with impartiality and fairness to all
the shareholders. Each report of an inspector shall be in writing and signed by
the inspector or by a majority of them if there is more than one inspector
acting at such meeting. If there is more than one inspector, the report of a
majority shall be the report of the inspectors. The report of the inspector or
inspectors on the number of shares represented at the meeting and the results of
the voting shall be prima facie evidence thereof.
Section 13. Voting by Ballot. Voting on any question or in any election may
be by voice vote unless the presiding officer shall order that voting be by
ballot.
Section 14. Organization of Meetings. At each meeting of shareholders, one
of the following officers shall act as chairman and shall preside thereat, in
the following order of precedence: the chairman of the board; the president; any
vice president acting in place of the president as provided by these by-laws;
any person designated by the affirmative vote of the holders of a majority of
the shares represented at the meeting in person or by proxy and entitled to
vote.
Section 15. Notice of Shareholder Business and Nominations.
(A) Annual Meetings of Shareholders.
(1) Nominations of persons for election to the board of directors of
the corporation and the proposal of business to be considered by the
shareholders may be made at an annual meeting of shareholders (a) pursuant to
the corporation's notice of meeting, (b) by or at the direction of the board of
directors, (c) as expressly provided in the corporation's articles of
incorporation, or (d) by any shareholder of record of the corporation at the
relevant time, provided that shareholders of common stock of the corporation
(the "COMMON STOCK SHAREHOLDERS") comply with the notice procedures set forth in
Section 15(A)(2)-(3) below.
(2) For nominations or other business to be properly brought before an
annual meeting by a Common Stock Shareholder, such shareholder must have given
timely notice thereof in writing to the secretary of the corporation and such
other business must be a proper matter for shareholder action. To be timely, the
Common Stock Shareholder's notice shall be delivered to the secretary of the
corporation at the principal executive offices of the corporation
4
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not later than the close of business on the 90th day nor earlier than the close
of business on the 120th day prior to the first anniversary of the preceding
year's annual meeting; provided, however, that in the event that the date of the
annual meeting is more than 30 days before or more than 60 days after such
anniversary date, notice by the shareholder to be timely must be so delivered
not earlier than the close of business on the 120th day prior to such annual
meeting and not later than the close of business on the later of the 90th day
prior to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made. In no event shall the
public announcement of an adjournment of an annual meeting commence a new time
period for the giving of a Common Stock Shareholder's notice as described above.
Such shareholder's notice shall set forth: (a) as to each person whom the
shareholder proposes to nominate for election or reelection as a director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "EXCHANGE Act"), and Rule 14a-11
thereunder (including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); (b) as to any
other business that the shareholder proposes to bring before the meeting, a
brief description of the business described to be brought before the meeting,
the reasons for conducting such business at the meeting and any material
interest in such business of such shareholder and the beneficial owner, if any,
on whose behalf the proposal is made; and (c) as to the shareholder giving the
notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made (i) the name and address of such shareholder, as they appear on
the corporations' book and of such beneficial owner and (ii) the class and
number of shares of the corporation which are owned beneficially and of record
by such shareholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(A)(2) of this Section 15 to the contrary and except with respect to the first
annual meeting of the corporation, in the event that the number of directors to
be elected to the board of directors of the corporation is increased and there
is no public announcement naming the nominees for director or specifying the
size of the increased board of directors made by the corporation at least 100
days prior to the first anniversary of the preceding year's annual meeting, a
Common Stock Shareholder's notice required by this Section 15 shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the secretary of the
corporation at the principal executive offices of the corporation not later than
the close of business on the 10th day following the day on which such public
announcement is first made by the corporation.
(B) Special Meetings of Shareholders. Only such business shall be
conducted at a special meeting of shareholders as shall have been
brought before the meeting pursuant to a notice of meeting given
pursuant to Section 4 of this Article II. Nominations of persons for
election to the board of directors may be made at a special meeting of
shareholders at which directors are to be elected pursuant to the
corporation's notice of meeting (1) by or at the direction of the
board of directors or (2) by any shareholder of the corporation who is
a shareholder of record at the time of giving of notice provided for
in this Section 15, who shall be entitled to
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vote at the meeting and who complies with the notice procedures set
forth in this Section 15. In the event the corporation calls a special
meeting of shareholders for the purpose of electing one or more
directors to the board of directors, any such shareholder may nominate
a person or persons (as the case may be), for election to such
position(s) as specified in the corporation's notice of meeting, if
the shareholder's notice required by paragraph (A)(2) of this Section
15 shall be delivered to the secretary of the corporation at the
principal executive office of the corporation not earlier than the
close of business on the 120th day prior to such special meeting and
not later than the close of business on the later of the 90th day
prior to such special meeting or the 10th day following the day on
which public announcement is first made of the date of the special
meeting and of the nominees proposed by the board of directors to be
elected at such meeting. In no event shall the public announcement of
an adjournment of a special meeting commence a new time period for the
giving of a shareholder's notice as described above.
(C) General.
(1) Only such persons who are nominated in accordance with the
procedures set forth in this Section 15 shall be eligible to serve as directors
and only such business shall be conducted at a meeting of shareholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 15. Except as otherwise provided by law, the articles of
incorporation of the corporation or these by-laws, the chairman of the meeting
shall have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made, or proposed, as the case may
be, in accordance with the procedures set forth in this Section 15 and, if any
proposed nomination or business is not in compliance with this Section 15, to
declare that such defective proposal or nomination shall be disregarded.
(2) For purposes of this Section 15, "PUBLIC ANNOUNCEMENT" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 15, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder, if any, with respect to the
matters set forth in this Section 15. Nothing in this Section 15 shall be deemed
to affect any rights of (i) shareholders to request inclusion of proposals in
the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act
or (ii) the holders of any series of preferred shares of the corporation to
elect directors under specified circumstances.
(4) No provision of this Section 15 shall apply to the election of any
Class B Director (as defined in the Articles of Incorporation).
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ARTICLE III
DIRECTORS
Section 1. Powers. The business and affairs of the corporation shall be
managed by or under the direction of its board of directors.
Section 2. Tenure and Qualifications. Each director shall hold office until
the next annual meeting of shareholders following his or her election and until
his or her successor shall have been duly elected and qualified or until his or
her earlier death, resignation or removal. A director need not be a resident of
the State of Illinois or a shareholder of the corporation. A director may resign
at any time by giving written notice to the board of directors, or to the
chairman of the board, chief executive officer, president or secretary of the
corporation. A resignation shall be effective when the notice is given, unless
the notice specifies a future date. In addition to the directors who shall be
elected by the shareholders of the corporation, the board of directors may also
designate, by resolution of the Board, an advisory director who shall be
entitled to attend all meetings of the board, but shall not be entitled to vote
on any matters before the board. Except as set forth in this Section 2, the
advisory director shall have no rights as a director either under these Bylaws,
Dynegy's charter, Illinois law or any other agreement to which the corporation
is a party. Notwithstanding the foregoing, an advisory director shall be
entitled to receive compensation for his or her services as a director in the
same amount and manner that such director would be entitled to receive
compensation as an employee director or non-employee director, as the case may
be, if such director were elected by the stockholders of the corporation."
Section 3. Place of Meetings. The board of directors of the corporation may
hold meetings, both regular and special, either within or without the State of
Illinois.
Section 4. Regular Meetings. A regular meeting of the board of directors
shall be held without other notice than this by-law, immediately after, and at
the same place as, the annual meeting of shareholders. Other regular meetings of
the board of directors may be held without notice at such time and at such place
as shall from time to time be determined by the board.
Section 5. Special Meetings. Special meetings of the board of directors may
be called by the chairman of the board and shall be called by the chairman of
the board or secretary on the written request of three directors or the sole
director, as the case may be.
Section 6. Notice. Notice of any special meeting shall be given: (i) at
least five days prior thereto if the notice is given personally or by an
electronic transmission, (ii) at least five business days prior thereto if the
notice is given by having it delivered by a third party entity that provides
delivery services in the ordinary course of business and guarantees delivery of
the notice to the director no later than the following business day, and (iii)
at least seven business days prior thereto if the notice is given by mail.
Notice of any meeting where any actions described in Section 7.(B) will be
considered shall be given to Class B directors at least 30 days before the vote
on any such action and shall set forth the material terms thereof. For this
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purpose, the term "ELECTRONIC TRANSMISSION" may include, but shall not be
limited to, a facsimile, email or other electronic means. Notice shall be
delivered to the director's business address and/or telephone number and shall
be deemed given upon electronic transmission, upon delivery to the third party
delivery service, or upon being deposited in the United States mail with postage
thereon prepaid. Any director may waive notice of any meeting by signing a
written waiver of notice either before or after the meeting. Attendance of a
director at any meeting shall constitute a waiver of notice of such meeting,
except when a director attends a meeting for the express purpose of objecting to
the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the board of directors need be specified in the
notice or waiver of notice of such meeting.
Section 7. Quorum; Vote Required, Actions Requiring Approval.
(A) Except as provided in Section 7.(B), a majority of the directors then
in office, but not less than a majority of the minimum number of directors
specified by the articles of incorporation for the variable range of the number
of directors, shall constitute a quorum for the transaction of business at any
meeting of the board of directors, and the act of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors. If less than a majority of such number of directors are present at
the meeting, a majority of the directors present may adjourn the meeting from
time to time without further notice.
(B) Notwithstanding anything to the contrary herein, so long as any shares
of Class B Common Stock of the corporation are issued and outstanding and the
holders of Class B Common Stock have not terminated their rights to block such
actions granted to them under Section 4.1 of the Shareholder Agreement between
the corporation and Chevron U.S.A., Inc., dated June 13, 1999, the corporation
shall not take (or permit to be taken in its capacity as a shareholder or
partner or otherwise permit any subsidiary of the corporation to take) any of
the following actions if all of the Class B directors present at the meeting
where such action is considered vote against such action:
(1) amendment of Article II, Section 15(C)(4), Article III, Sections
6, 7.(B), 7.(C), or 12, Article IV, Section 1, Article V, Section 1, or Article
IX of these Bylaws, or amendment of Article IV, Section 2A. of the articles of
incorporation of the corporation;
(2) adoption of any provision of these Bylaws or amendment to the
articles of incorporation which would substantially and adversely affect the
rights of the holders of the Class B Common Stock.
(3) authorization of new shares of any stock of the corporation where
the aggregate consideration to be received by the corporation therefor exceeds
the greater of (a) $1 billion or (b) one-quarter of the Corporation's Market
Capitalization;
(4) any disposition of all or substantially all of the corporation's
Liquids Business (defined below) or Gas Marketing Business (as defined below),
so long as there shall
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be in effect any substantial agreements between Chevron U.S.A. Inc. and Dynegy
relating to such businesses, except for a contribution of such Liquids Business
to a joint venture, limited liability company or other form of partnership in
which the corporation has a majority direct or indirect interest;
(5) any merger or consolidation of the corporation or any subsidiary
(other than a merger or consolidation by a subsidiary with the corporation or
another subsidiary), any joint venture, any liquidation or dissolution of the
corporation, any voluntary initiation of a proceeding in bankruptcy or
acquiescence to an involuntary initiation of a proceeding in bankruptcy, any
acquisition of stock or assets by the corporation or its subsidiaries, or any
issuance of common or preferred stock by the corporation, any of which would
result in the payment or receipt of consideration (including the incurrence or
assumption of indebtedness and liabilities) having a fair market value exceeding
the greater of (a) $1 billion or (b) one-quarter of the Corporation's Market
Capitalization (as defined below); or
(6) any other material transaction (or series of related transactions)
which would result in the payment or receipt of consideration (including the
incurrence or assumption of indebtedness and liabilities) having a fair market
value exceeding the greater of (a) $1 billion or (b) one-quarter of the
Corporation's Market Capitalization, and is out of the ordinary course of
business for the corporation.
For purposes of this Section, the "CORPORATION'S MARKET CAPITALIZATION"
means the sum of (a) the product of (x) the total number of shares outstanding
of Class A and Class B Common Stock of the corporation on the relevant date and
(y) the closing price of the Class A Common Stock on the New York Stock Exchange
("NYSE") at the end of the regular session represented by the consolidated tape,
Network A, (b) the product of (x) the total number of shares outstanding of all
of the corporation's NYSE traded preferred stock on the relevant date and (y)
the closing price of such preferred stock on the NYSE at the end of the regular
session represented by the consolidated tape, Network A and (c) the aggregate
value of the liquidation preference of any non-NYSE listed non-convertible stock
of the corporation and (d) the aggregate value of the greater of the liquidation
preference and the value of the underlying common stock (calculated in
accordance with (a) of this paragraph) issuable upon conversion of any non-NYSE
listed convertible preferred stock on the relevant date. The "LIQUIDS BUSINESS"
means the processing of natural gas to produce natural gas liquids, the
fractionation of natural gas liquids, and the purchase, sale and transportation
of such natural gas liquids. The "Gas Marketing Business" shall mean the
purchase, receipt, sale and delivery of natural gas, excluding the retail gas
distribution business conducted by Illinova Corporation ("ILLINOVA") and its
affiliates prior to the closing of the transactions contemplated by the
Agreement and Plan of Merger, dated as of June 13, 1999, by and among the
Corporation, Illinova, Dynegy, Inc., Energy Convergence Acquisition Corporation,
and Dynegy Acquisition Corporation.
(C) The executive officers of the Corporation shall advise the members of
the Board of Directors of the consideration of a proposal relating to any matter
of the type described in Section 7.(B) at such time as they determine to give
substantive attention to such proposal.
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Section 8. Informal Action by Directors. Any action required to be taken at
a meeting of the board of directors, or any other action which may be taken at a
meeting of the board of directors or a committee thereof, may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all the directors entitled to vote with respect to the subject matter
thereof, or by all the members of such committee, as the case may be. The
consent shall be evidenced by one or more written approvals, each of which sets
forth the action taken and bears the signature of one or more directors. All the
approvals evidencing the consent shall be delivered to the secretary to be filed
in the corporate records. The action taken shall be effective when all the
directors have approved the consent unless the consent specifies a different
effective date. Any such consent signed by all the directors or all the members
of a committee shall have the same effect as a unanimous vote, and may be stated
as such in any document filed with the Secretary of State of Illinois under the
Business Corporation Act.
Section 9. Participation with Communications Equipment. Members of the
board of directors or of any committee of the board of directors may participate
in and act at any meeting of such board or committee through the use of a
conference telephone or other communications equipment by means of which all
persons participating in the meeting can hear each other. Participation in such
meeting shall constitute attendance and presence in person at the meeting of the
person or persons so participating.
Section 10. Compensation of Directors. The board of directors shall have
the authority to fix the compensation of directors by the affirmative vote of a
majority of the directors then in office and irrespective of any personal
interest of any of its members. In addition, the directors may be paid their
expenses, if any, of attendance at each meeting of the board of directors. No
such payment shall preclude any director from serving the corporation in any
other capacity and receiving compensation therefor. Members of special or
standing committees may be compensated additionally for so serving.
Section 11. Presumption of Assent. A director of the corporation who is
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be conclusively presumed to have assented to the action
taken unless the dissent of that director shall be entered in the minutes of the
meeting or unless that director shall file a written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered or certified mail to the secretary
of the corporation immediately after the adjournment of the meeting. Such right
to dissent shall not apply to a director who voted in favor of such action.
Section 12. Agenda Items. No action may be taken at a meeting of the board
of directors with respect to any matter that was not previously set forth on an
agenda for such meeting delivered to the directors at least two business days
prior to such meeting if either a majority of the Class B Directors present at
such meeting or a majority of the other directors present at such meeting oppose
taking action at such meeting with respect to such matter.
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ARTICLE IV
COMMITTEES OF THE BOARD OF DIRECTORS
Section 1. Establishment of Committees. A majority of the directors may
create one or more committees and appoint members of the board of directors to
serve on the committee or committees. Each committee shall have two or more
members, who serve at the pleasure of the board of directors. The board of
directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
such committee. Any vacancy in a committee may be filled by the board of
directors. Each committee shall keep regular minutes of its meetings and report
the same to the board of directors as required. Unless precluded by applicable
law or any applicable rule of the New York Stock Exchange, Inc., each committee
other than the Nomination Committee shall have at least one Class B Director
thereon.
Section 2. Manner of Acting. Unless the appointment by the board of
directors requires a greater number, a majority of any committee shall
constitute a quorum and a majority of a quorum shall be necessary for action by
any committee. A committee may act by unanimous consent in writing without a
meeting. Each committee, by majority vote of its members, shall determine the
time and place of meetings and the notice required therefor.
Section 3. Authority of Committees. To the extent specified by resolution
of the board of directors and these by-laws, each committee may exercise the
authority of the board of directors, provided, however, a committee may not:
a) authorize distributions, except for dividends to be paid with respect
to shares of any preferred or special classes or any series thereof;
b) approve or recommend to shareholders any act requiring the approval of
shareholders under applicable law;
c) fill vacancies on the board or any committee;
d) elect or remove officers or fix the compensation of any member of the
committee;
e) adopt, amend or repeal these by-laws;
f) approve a plan of merger not requiring shareholder approval;
g) authorize or approve reacquisition of shares, except according to a
general formula or method prescribed by the board of directors;
h) authorize or approve the issuance or sale, or contract for sale, of
shares, or determine the designation and relative rights, preferences,
and limitations of a series of shares, except the board may direct
that a committee may fix the specific terms of the issuance or sale or
contract for sale, or the number of shares to be allocated to
particular employees under an employee benefit plan; or
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i) amend, alter, repeal, or take action inconsistent with any resolution
or action of the board of directors when the resolution or action of
the board of directors provides by its terms that it shall not be
amended, altered or repealed by action of a committee.
Section 4.
(a) Executive Committee. The Board of Directors shall establish an
Executive Committee. The Executive Committee, during intervals between
meetings of the Board of Directors, shall have, and may exercise,
subject to the limitations contained in Section 3 of this Article, the
powers of the Board of Directors in the management of the business and
affairs of the corporation.
(b) Compensation Committee. The Board of Directors shall establish a
Compensation Committee consisting of directors who are not otherwise
employed by the corporation. The Compensation Committee shall review
from time to time, the salaries, compensation and employee benefits
(other than option plans and grants) for the executive officers and
employees of the corporation and make recommendations to the board of
directors concerning such matters.
(c) Nomination Committee. The Board of Directors shall establish a
Nomination Committee consisting of directors who are not otherwise
employed by the corporation. The Nomination Committee shall consider
matters related to corporate governance, develop general criteria
regarding the selection and qualifications for members of the Board of
Directors and recommend candidates for election to the Board of
Directors.
(d) Options Committee. The Board of Directors shall establish an Options
Committee comprised solely of independent "disinterested" directors.
The Options Committee shall be responsible for all aspects of the
Company's stock plans including plan administration, and shall review
and recommend to the Board of Directors new plans or changes to
current plans, including increasing the number of shares reserved for
such plans."
(e) Finance Committee. The Board of Directors shall establish a Finance
Committee. The Finance Committee shall review major financial
decisions of the corporation and make recommendations to the Board of
Directors concerning such matters.
(f) Audit Committee. The Board of Directors shall establish an Audit
Committee consisting solely of independent, "disinterested" directors.
The Audit Committee shall review the selection and qualifications of
the independent public accountants employed by the corporation to
audit the financial statements of the corporation and the scope and
adequacy of their audits, consider recommendations made by such
independent public accountants, review internal financial audits of
the
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corporation, and report any additions or changes it deems necessary to
the Board of Directors."
(g) Risk and Environmental Committee. The Board of Directors shall
establish a Risk and Environmental Committee consisting of directors
who are not otherwise employed by the corporation. The Risk and
Environmental Committee shall consider matters related to insurance
and environmental issues and shall make recommendations to the Board
of Directors concerning such matters.
ARTICLE V
OFFICERS
Section 1. Officers. The officers of the corporation shall consist of a
chief executive officer, chairman of the board, president, one or more vice
presidents (the number, seniority and any other designations thereof to be
determined by the board of directors), a secretary, a treasurer, a controller,
and such other officers as may be elected by the board of directors. Any two or
more offices may be held by the same person.
Section 2. Additional Officers and Agents. The board of directors may
appoint such other officers and agents as it shall deem necessary, who shall
exercise such powers and perform such duties as shall be determined from time to
time by the board.
Section 3. Compensation of Officers. The compensation of all officers and
agents of the corporation shall be fixed by or under the direction of the board
of directors. No officer shall be prevented from receiving such compensation by
reason of the fact that such officer is also a director of the corporation.
Section 4. Term of Office and Vacancy. Each elected officer shall hold
office until a successor is elected and qualified or until such officer's
earlier resignation or removal. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors for the unexpired portion
of the term. Each appointed officer shall serve at the pleasure of the board of
directors. Election or appointment of an officer or agent shall not of itself
create contract rights.
Section 5. Removal. Any officer or agent may be removed by the board of
directors whenever in its judgment the best interests of the corporation will be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
or agent shall not of itself create contract rights.
Section 6. Chief Executive Officer. The chairman of the board may, but need
not, be the chief executive officer of the corporation. The chief executive
officer shall (a) determine and administer the policies of the corporation,
subject to the instructions of the board of directors; (b) be authorized to
execute all documents in the name and on behalf of the corporation; and (c)
perform all duties incident to the office of chief executive officer and such
other duties as the board of directors or bylaws may from time to time
prescribe.
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Section 7. Chairman of the Board. The chairman of the board, or in his or
her absence, the president, shall preside at all meetings of the shareholders
and the board of directors.
Section 8. President. The president shall (a) be the chief operating
officer of the corporation, and shall in general be in charge of the operations
of the corporation, subject to the control of the board of directors; (b) be
authorized to execute all documents in the name and on behalf of the
corporation; and (c) perform all duties incident to the office of president and
such other duties as the board of directors may from time to time prescribe.
Section 9. Vice Presidents. In the absence of the president or in the event
of the inability or refusal of the president to act, the vice president (or in
the event there is more than one vice president, the vice presidents in the
order of seniority of title, or in the event of equal seniority, then in the
order designated, or in the absence of any designation, then in the order named
in the most recent resolution providing for the annual election of officers)
shall perform the duties of the president, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the president. Any
vice president shall perform such other duties and have such other powers as the
board of directors or the chief executive officer or president may from time to
time prescribe.
Section 10. Secretary. The secretary shall (a) attend meetings of the board
of directors and meetings of the shareholders and record minutes of the
proceedings of the meetings of the shareholders and of the board of directors,
and when required, shall perform like duties for the committees of the board;
(b) assure that all notices are duly given in accordance with the provisions of
these by-laws or as required by law; (c) maintain custody of the corporate
records of the corporation; (d) keep or cause to be kept a register of the post
office address of each shareholder as furnished to the secretary by such
shareholder; (e) sign with the chief executive officer, president or a vice
president certificates for shares of the corporation, the issuance of which
shall have been authorized by resolution of the board of directors; (f) have
charge of the stock transfer books of the corporation and authority over a stock
transfer agent, if any; (g) certify copies of the bylaws, resolutions of the
shareholders and board of directors and committees thereof and other documents
of the corporation as true and correct copies thereof; and (h) perform all
duties incident to the office of secretary and such other duties as the board of
directors or the chief executive officer or president may from time to time
prescribe.
Section 11. Assistant Secretaries. The assistant secretary, or if there is
more than one, the assistant secretaries, respectively, as authorized by the
board of directors, may sign with the president or a vice president certificates
for shares of the corporation, the issuance of which shall have been authorized
by resolution of the board of directors, and shall, in the absence of the
secretary or in the event of the inability or refusal of the secretary to act,
perform the duties and exercise the powers of the secretary, and shall perform
such other duties as the board of directors, chief executive officer, president
or secretary may from time to time prescribe.
Section 12. Treasurer. The treasurer shall (a) have custody of the funds
and securities of the corporation; (b) deposit all moneys and other valuable
effects in the name and to the credit of the corporation in such depositories as
may be designated by the board of directors; (c) maintain adequate accounts of
the corporation; (d) disburse the funds of the corporation as
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may be ordered by the board of directors; (e) submit financial statements to the
president and the board of directors; and (f) perform all duties incident to the
office of treasurer and such other duties as the board of directors or the chief
executive officer or president may from time to time prescribe.
Section 13. Assistant Treasurers. The assistant treasurer, or if there is
more than one, the assistant treasurers, respectively, as authorized by the
board of directors, shall, in the absence of the treasurer or in the event of
the inability or refusal of the treasurer to act, perform the duties and
exercise the power of the treasurer and shall perform such other duties and have
such other power as the board of directors, the chief executive officer,
president or treasurer may from time to time prescribe.
Section 14. Controller. The controller shall conduct the accounting
activities of the corporation, including the maintenance of the corporation's
general and supporting ledgers and books of account, operating budgets, and the
preparation and consolidation of financial statements.
Section 15. General Powers of Officers. The chairman of the board, chief
executive officer, president, any executive vice president, senior vice
president and any vice president, may sign without countersignature or
attestation any deeds, mortgages, bonds, contracts, reports to public agencies,
or other instruments whether or not the board of directors has expressly
authorized execution of such instruments, except in cases where the signing and
execution thereof shall be expressly delegated by the board of directors or by
these by-laws solely to some other officer or agent of the corporation, or shall
be required by law to be otherwise signed or executed. Any other officer of this
corporation may sign contracts, reports to public agencies, or other instruments
which are in the regular course of business and within the scope of his or her
authority, except where the signing and execution thereof shall be expressly
delegated by the board of directors or by these by-laws to some other officer or
agent of the corporation, or shall be required by law to be otherwise signed or
executed.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. The board of directors may authorize any officer or
officers, or agent or agents, to enter into any contract and execute and deliver
any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances.
Section 2. Checks, Drafts, Notes. All checks, drafts or other orders for
the payment of money, notes and other evidences of indebtedness, issued in the
name of the corporation, shall be signed by such officer or officers, or agent
or agents, of the corporation and in such manner as shall from time to time be
determined by resolution of the board of directors.
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Section 3. Deposits. All funds of the corporation other than petty cash
shall be deposited to the credit of the corporation in such banks, trust
companies or other depositories as the board of directors may select.
ARTICLE VII
SHARES
Section 1. Issued Shares. The issued shares of the corporation may be
represented by certificates, or may be uncertificated shares, in either case in
whole or in part, as determined and authorized by the board of directors.
Section 2. Certificates for Shares. Certificates representing shares of the
corporation shall be in such form as may be determined by the board of
directors. Such certificates shall be signed by the chairman of the board, chief
executive officer or president and by the secretary or an assistant secretary.
If a certificate is countersigned by a transfer agent or registrar, other than
the corporation itself or its employee, any other signatures or countersignature
on the certificate may be facsimiles. If any officer of the corporation, or any
officer or employee of the transfer agent or registrar, who has signed or whose
facsimile signature has been placed upon such certificate ceases to be an
officer of the corporation, or an officer or employee of the transfer agent or
registrar, before such certificate is issued, the certificate may be issued by
the corporation with the same effect as if the officer of the corporation, or
the officer or employee of the transfer agent or registrar, had not ceased to be
such at the date of its issue. Certificates for shares shall be individually
numbered or otherwise individually identified. Each certificate for shares shall
state the name of the registered owner of the shares in the stock ledger, the
number and the class and series, if any, of such shares, and the date of
issuance of the certificate. If the corporation is authorized to issue more than
one class of stock, a full summary or statement of all of the designations,
preferences, qualifications, limitations, restrictions, and special or relative
rights of each class authorized to be issued, and, if the corporation is
authorized to issue any preferred or special class in series, the variations in
the relative rights and preferences among such series, shall be set forth upon
the face or back of the certificate. Such statement may be omitted if it shall
be set forth upon the face or back of the certificate that such statement, in
full, will be furnished by the corporation to any shareholder upon request and
without charge.
Section 3. Uncertificated Shares. The board of directors may provide by
resolution that some or all of any or all classes and series of its shares shall
be uncertificated shares, and may provide an election by individual shareholders
to receive certificates or uncertificated shares and the conditions of such
election, provided that such resolution shall not apply to shares represented by
a certificate until such certificate is surrendered to the corporation. Within a
reasonable time after the registration of issuance or transfer of uncertificated
shares, the corporation shall send to the registered owner thereof a written
notice containing the information required to be set forth or stated on
certificates pursuant to the Business Corporation Act or these by-laws. Except
as otherwise expressly provided by law, the rights and obligations of the
holders of uncertificated shares and rights and obligations of the holders of
certificates representing shares of the same class and series shall be
identical.
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Section 4. Registration of Transfers of Shares. Transfers of shares shall
be registered in the records of the corporation upon request by the registered
owner thereof in person or by a duly authorized attorney, upon presentation to
the corporation or to its transfer agent (if any) of a duly executed assignment
and other evidence of authority to transfer, or proper evidence of succession,
and, if the shares are represented by a certificate, a duly endorsed certificate
or certificates for shares surrendered for cancellation, and with such proof of
the authenticity of the signatures as the corporation or its transfer agent may
reasonably require. The person in whose name shares are registered in the stock
ledger of the corporation shall be deemed the owner thereof for all purposes as
regards to the corporation.
Section 5. Lost Certificates. The corporation may issue a new share,
certificate in the place of any certificate theretofore issued by it, alleged to
have been lost, stolen, or destroyed, upon the making of an affidavit of that
fact, by the person claiming the share certificate to be lost, stolen or
destroyed. When authorizing such issuance of a new certificate or certificates
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or the owner's legal representative, to advertise
the same in such manner as it shall require or to give the corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the corporation with respect to the certificate or certificates alleged
to have been lost, stolen or destroyed.
ARTICLE VIII
OTHER PROVISIONS
Section 1. Distributions. The board of directors may authorize, and the
corporation may make, distributions to its shareholders, subject to any
restriction in the articles of incorporation and subject to any limitations
provided by law.
Section 2. Fiscal Year. The fiscal year of the corporation shall be fixed,
and shall be subject to change, by the board of directors.
Section 3. Seal. The board of directors may, but shall not be required to,
provide by resolution for a corporate seal, which may be used by causing it, or
a facsimile thereof, to be impressed or affixed or in any other manner
reproduced.
ARTICLE IX
EMERGENCY BY-LAWS
Section 1. Emergency Board of Directors. In the event a quorum of the board
of directors cannot readily be convened for action due to (a) an attack or
imminent attack on the United States or any of its possessions, (b) any nuclear
or atomic disaster, or (c) any other catastrophe or emergency condition, the
vacant director positions shall be filled by the following persons (provided in
each case such person is not already a director and is willing and able to
serve) in the following order: the president, the vice presidents in order of
seniority, the
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treasurer, the secretary, any other officers in order of seniority and any other
persons in such order as named by the board of directors on any list as it may
compile from time to time for purposes of appointing such successor directors;
provided, however, that to the extent possible, the holders of Class B Common
Stock shall be entitled to nominate a number of directors to such board of
directors proportionate to the representation on the board of directors
immediately prior to such emergency condition to which the holders of Class B
Common Stock were entitled. Such new board of directors shall be referred to as
the emergency board of directors of the corporation. The initial Chairman of the
Board of the emergency board of directors ("CHAIRMAN") shall be the
regularly-elected director, if any, who has served on the board of directors for
the longest period of time and, if all directors on the emergency board of
directors are successor directors appointed pursuant to this Section, the
Chairman shall be determined according to the same order of priority as such
successor directors are appointed pursuant to this Section. The directors
appointed pursuant to this Section shall serve until the next annual or special
meeting of shareholders at which directors are to be elected or until the
emergency condition shall have terminated.
Section 2. Powers. The emergency board of directors shall have all of the
rights, powers and duties of the board of directors except such emergency board
of directors may not amend the Articles of Incorporation of the corporation nor
approve a merger, sale of all or substantially all of the assets of the
corporation, liquidation or dissolution.
Section 3. Notice of Meetings. Notice of any meeting of the emergency board
of directors held during any emergency described in Section l of this Article IX
may be given only to such directors or successor directors as it may be feasible
to reach at the time and by such means as may be feasible at the time,
including, without limitation, publication or radio.
Section 4. Liability. No officer, director or employee of the corporation
acting in accordance with this Article IX shall be liable to the corporation,
except for willful misconduct.
Section 5. By-laws. To the extent not inconsistent with this Article IX,
the by-laws of the corporation shall remain in effect during any emergency
described in Section l of this Article IX.
Section 6. Interpretation. If, by operation of law or otherwise, any of the
provisions of this Article IX are deemed to be invalid or not controlling, such
provisions shall be construed by any court or agency having competent
jurisdiction as a determinative factor evidencing the intent of the corporation.
ARTICLE X
AMENDMENTS
Subject to the provisions of the Articles of Incorporation, these by-laws
may be altered, amended or repealed, and new by-laws may be adopted, by the
board of directors; provided that no amendment or repeal of Article II, Section
15(c)(4), Article III, Sections 6, 7.(B), 7.(C) or 12, Article IV, Section 1,
Article V, Section 1, or Article IX, Section 1, nor the adoption of any
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provision of these Bylaws which would substantially and adversely affect the
rights of the holders of Class B Common Stock shall be effective except upon the
approval of the affirmative vote of the majority of the Class B directors and a
majority of the entire number of directors then in office. Subject to the
provisions of the articles of incorporation, these by-laws may also be altered,
amended or repealed by the shareholders of the corporation.
ARTICLE XI
INDEMNIFICATION OF EMPLOYEES AND AGENTS
The corporation may indemnify any agent or employee of the corporation who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (including, but not limited to any such
proceeding by or in the right of the corporation) whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was serving
the corporation at its request and in the course and scope of his duties and
acting in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation, against expenses (including
reasonable attorney's fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action, suit or proceeding.
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EXHIBIT 10.6
DYNEGY INC.
1999 LONG TERM INCENTIVE PLAN
I. PURPOSE
The purpose of the DYNEGY INC. 1999 LONG TERM INCENTIVE PLAN (the "Plan")
is to provide a means through which DYNEGY INC., a Delaware corporation (the
"Company"), and its subsidiaries may attract able persons to enter the employ of
the Company and its affiliates and to provide a means whereby those individuals
upon whom the responsibilities of the successful administration and management
of the Company and its affiliates rest, and whose present and potential
contributions to the welfare of the Company and its affiliates are of
importance, can acquire and maintain stock ownership, thereby strengthening
their concern for the welfare of the Company and its affiliates. A further
purpose of the Plan is to provide such individuals with additional incentive and
reward opportunities designed to enhance the profitable growth of the Company
and its affiliates. Accordingly, the Plan provides for granting Incentive Stock
Options, options that do not constitute Incentive Stock Options, Restricted
Stock Awards, Performance Awards, and Phantom Stock Awards, or any combination
of the foregoing, as is best suited to the circumstances of the particular
employee as provided herein.
II. DEFINITIONS
The following definitions shall be applicable throughout the Plan unless
specifically modified by any paragraph:
(a) "AFFILIATE" means 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.
(b) "AWARD" means, individually or collectively, any Option, Restricted
Stock Award, Performance Award or Phantom Stock Award.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended. Reference
in the Plan to any section of the Code shall be deemed to include any amendments
or successor provisions to such section and any regulations under such section.
<PAGE> 2
(e) "COMMITTEE" means a committee of the Board that is selected by the
Board as provided in Paragraph IV(a).
(f) "COMMON STOCK" means the common stock, par value $.01 per share, of the
Company, or any security into which such Common Stock may be changed by reason
of any transaction or event of the type described in Paragraph XI.
(g) "COMPANY" means Dynegy Inc., a Delaware corporation.
(h) "DIRECTOR" means an individual elected to the Board by the stockholders
of the Company or by the Board under applicable corporate law who is serving on
the Board on the date the Plan is adopted by the Board or is elected to the
Board after such date.
(i) An "EMPLOYEE" means any person (including a Director) in an employment
relationship with the Company or any Affiliate.
(j) "FAIR MARKET VALUE" means, as of any specified date, the mean of the
high and low sales prices of the Common Stock reported on the stock exchange
composite tape on that date, or, if no prices are reported on that date, on the
last preceding date on which such prices of the Common Stock are so reported. In
the event Common Stock is not publicly traded at the time a determination of its
value is required to be made hereunder, the determination of its fair market
value shall be made by the Committee in such manner as it deems appropriate.
(k) "HOLDER" means an employee who has been granted an Award.
(l) "INCENTIVE STOCK OPTION" means an incentive stock option within the
meaning of section 422 of the Code.
(m) "1934 ACT" means the Securities Exchange Act of 1934, as amended.
(n) "OPTION" means an Award granted under Paragraph VII of the Plan and
includes both Incentive Stock Options to purchase Common Stock and Options that
do not constitute Incentive Stock Options to purchase Common Stock.
(o) "OPTION AGREEMENT" means a written agreement between the Company and a
Holder with respect to an Option.
(p) "PERFORMANCE AWARD" means an Award granted under Paragraph IX of the
Plan.
(q) "PERFORMANCE AWARD AGREEMENT" means a written agreement between the
Company and a Holder with respect to a Performance Award.
(r) "PHANTOM STOCK AWARD" means an Award granted under Paragraph X of the
Plan.
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(s) "PHANTOM STOCK AWARD AGREEMENT" means a written agreement between the
Company and a Holder with respect to a Phantom Stock Award.
(t) "PLAN" means the Dynegy Inc. 1999 Long Term Incentive Plan, as amended
from time to time.
(u) "RESTRICTED STOCK AGREEMENT" means a written agreement between the
Company and a Holder with respect to a Restricted Stock Award.
(v) "RESTRICTED STOCK AWARD" means an Award granted under Paragraph VIII of
the Plan.
(w) "RULE 16B-3" means SEC Rule 16b-3 promulgated under the 1934 Act, as
such may be amended from time to time, and any successor rule, regulation or
statute fulfilling the same or a similar function.
(x) "STOCK APPRECIATION RIGHT" shall have the meaning assigned to such term
in Paragraph VII(d) of the Plan.
III. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall become effective upon the date of its adoption by the Board,
provided the Plan is approved by the stockholders of the Company within twelve
months thereafter. Notwithstanding any provision in the Plan, no Option shall be
exercisable and no Award shall vest or become satisfiable prior to such
stockholder approval. No further Awards may be granted under the Plan after ten
years from the date the Plan is adopted by the Board. The Plan shall remain in
effect until all Options granted under the Plan have been exercised or expired,
all Restricted Stock Awards granted under the Plan have vested or been
forfeited, and all Performance Awards and Phantom Stock Awards have been
satisfied or expired.
IV. ADMINISTRATION
(a) COMPOSITION OF COMMITTEE. The Plan shall be administered by a committee
of, and appointed by, the Board, and such committee shall be comprised solely of
two or more outside Directors (within the meaning of the term "outside
directors" as used in section 162(m) of the Code and applicable interpretive
authority thereunder and within the meaning of "Non-Employee Director" as
defined in Rule 16b-3).
(b) POWERS. Subject to the express provisions of the Plan, the Committee
shall have authority, in its sole discretion, to determine which employees shall
receive an Award, the time or times when such Award shall be made, whether an
Incentive Stock Option or nonqualified Option shall be granted, and the number
of shares to be subject to each Option or Restricted Stock Award, the number of
shares subject to or the value of each Performance Award, and the value of each
Phantom Stock Award. In making such determinations, the Committee shall take
into account the nature of the services rendered by the respective employees,
their present and potential contribution to the Company's success and such other
factors as the Committee in its sole discretion shall deem relevant.
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(c) ADDITIONAL POWERS. The Committee shall have such additional powers as
are delegated to it by the other provisions of the Plan. Subject to the express
provisions of the Plan, this shall include the power to construe the Plan and
the respective agreements executed hereunder, to prescribe rules and regulations
relating to the Plan, and to determine the terms, restrictions and provisions of
the agreement relating to each Award, including such terms, restrictions and
provisions as shall be requisite in the judgment of the Committee to cause
designated Options to qualify as Incentive Stock Options, and to make all other
determinations necessary or advisable for administering the Plan. The Committee
may correct any defect or supply any omission or reconcile any inconsistency in
the Plan or in any agreement relating to an Award in the manner and to the
extent it shall deem expedient to carry it into effect. The determinations of
the Committee on the matters referred to in this Paragraph IV shall be
conclusive.
V. SHARES SUBJECT TO THE PLAN; GRANT OF OPTIONS;
GRANT OF RESTRICTED STOCK AWARDS
(a) SHARES SUBJECT TO THE PLAN AND AWARD LIMITS. Subject to adjustment in
the same manner as provided in Paragraph XI with respect to shares of Common
Stock subject to Options then outstanding, the aggregate number of shares of
Common Stock that may be issued under the Plan shall not exceed 5,000,000
shares. Shares shall be deemed to have been issued under the Plan only to the
extent actually issued and delivered pursuant to an Award. To the extent that an
Award lapses or the rights of its Holder terminate, any shares of Common Stock
subject to such Award shall again be available for the grant of an Award under
the Plan. Notwithstanding any provision in the Plan to the contrary, the maximum
number of shares of Common Stock that may be subject to Options, Restricted
Stock Awards and Performance Awards denominated in shares of Common Stock
granted to any one individual during any calendar year may not exceed 1,000,000
shares of Common Stock (subject to adjustment in the same manner as provided in
Paragraph XI with respect to shares of Common Stock subject to Options then
outstanding) and the maximum value of any Performance Award denominated in cash
(including the Fair Market Value of any shares of Common Stock paid in
satisfaction of such Performance Award) granted to any one individual during any
calendar year may not exceed $3,000,000. The limitations set forth in the
preceding sentence shall be applied in a manner which will permit compensation
generated under the Plan to constitute "performance-based" compensation for
purposes of section 162(m) of the Code, including, without limitation, counting
against such maximum number of shares, to the extent required under section
162(m) of the Code and applicable interpretive authority thereunder, any shares
subject to Options that are canceled or repriced.
(b) GRANT OF AWARDS. The Committee may from time to time grant Awards to
one or more employees determined by it to be eligible for participation in the
Plan in accordance with the terms of the Plan.
(c) STOCK OFFERED. Subject to the limitations set forth in Paragraph V(a),
the stock to be offered pursuant to the grant of an Award may be authorized but
unissued Common Stock or
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Common Stock previously issued and outstanding and reacquired by the Company.
Any of such shares which remain unissued and which are not subject to
outstanding Awards 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.
VI. ELIGIBILITY
Awards may be granted only to persons who, at the time of grant, are
employees. An Award may be granted on more than one occasion to the same person,
and, subject to the limitations set forth in the Plan, such Award may include an
Incentive Stock Option, an Option that is not an Incentive Stock Option, a
Restricted Stock Award, a Performance Award, a Phantom Stock Award, or any
combination thereof.
VII. STOCK OPTIONS
(a) OPTION PERIOD. The term of each Option shall be as specified by the
Committee at the date of grant.
(b) LIMITATIONS ON EXERCISE OF OPTION. An Option shall be exercisable in
whole or in such installments and at such times as determined by the Committee.
(c) SPECIAL LIMITATIONS ON INCENTIVE STOCK OPTIONS. An Incentive Stock
Option may be granted only to an individual who is employed by the Company or
any parent or subsidiary corporation (as defined in section 424 of the Code) at
the time the Option is granted. To the extent that the aggregate Fair Market
Value (determined at the time the respective Incentive Stock Option is granted)
of Common Stock with respect to which Incentive Stock Options granted after 1986
are exercisable for the first time by an individual during any calendar year
under all incentive stock option plans of the Company and its parent and
subsidiary corporations exceeds $100,000, such Incentive Stock Options shall be
treated as Options which do not constitute Incentive Stock Options. The
Committee shall determine, in accordance with applicable provisions of the Code,
Treasury Regulations and other administrative pronouncements, which of a
Holder's Incentive Stock Options will not constitute Incentive Stock Options
because of such limitation and shall notify the Holder of such determination as
soon as practicable after such determination. No Incentive Stock Option shall be
granted to an individual if, at the time the Option is granted, such individual
owns stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or of its parent or subsidiary corporation,
within the meaning of section 422(b)(6) of the Code, unless (i) at the time such
Option is granted the option price is at least 110% of the Fair Market Value of
the Common Stock subject to the Option and (ii) such Option by its terms is not
exercisable after the expiration of five years from the date of grant. An
Incentive Stock Option shall not be transferable otherwise than by will or the
laws of descent and distribution, and shall be exercisable during the Holder's
lifetime only by such Holder or the Holder's guardian or legal representative.
(d) OPTION AGREEMENT. Each Option shall be evidenced by an Option Agreement
in such form and containing such provisions not inconsistent with the provisions
of the Plan as the Committee from time to time shall approve, including, without
limitation, provisions to qualify an
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Incentive Stock Option under section 422 of the Code. Each Option Agreement
shall specify the effect of termination of employment on the exercisability of
the Option. An Option Agreement may provide for the payment of the option price,
in whole or in part, by the delivery of a number of shares of Common Stock (plus
cash if necessary) having a Fair Market Value equal to such option price.
Moreover, an Option Agreement may provide for a "cashless exercise" of the
Option by establishing procedures satisfactory to the Committee with respect
thereto. Further, an Option Agreement may provide for the surrender of the right
to purchase shares under the Option in return for a payment in cash or shares of
Common Stock or a combination of cash and shares of Common Stock equal in value
to the excess of the Fair Market Value of the shares with respect to which the
right to purchase is surrendered over the option price therefor ("Stock
Appreciation Rights"), on such terms and conditions as the Committee in its sole
discretion may prescribe. In the case of any such Stock Appreciation Right that
is granted in connection with an Incentive Stock Option, such right shall be
exercisable only when the Fair Market Value of the Common Stock exceeds the
price specified therefor in the Option or the portion thereof to be surrendered.
The terms and conditions of the respective Option Agreements need not be
identical.
(e) OPTION PRICE AND PAYMENT. The price at which a share of Common Stock
may be purchased upon exercise of an Option shall be determined by the Committee
but, subject to adjustment as provided in Paragraph XI shall not be less than
the Fair Market Value of a share of Common Stock on the date such Option is
granted. The Option or portion thereof may be exercised by delivery of an
irrevocable notice of exercise to the Company, as specified by the Committee.
The purchase price of the Option or portion thereof shall be paid in full in the
manner prescribed by the Committee. Separate stock certificates shall be issued
by the Company for those shares acquired pursuant to the exercise of an
Incentive Stock Option and for those shares acquired pursuant to the exercise of
any Option that does not constitute an Incentive Stock Option.
(f) STOCKHOLDER RIGHTS AND PRIVILEGES. The Holder shall be entitled to all
the privileges and rights of a stockholder only with respect to such shares of
Common Stock as have been purchased under the Option and for which certificates
of stock have been registered in the Holder's name.
(g) OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER
CORPORATIONS. Options and Stock Appreciation Rights may be granted under the
Plan from time to time in substitution for stock options held by individuals
employed by corporations who become employees as a result of a merger or
consolidation or other business combination of the employing corporation with
the Company or any Affiliate.
VIII. RESTRICTED STOCK AWARDS
(a) FORFEITURE RESTRICTIONS TO BE ESTABLISHED BY THE COMMITTEE. Shares of
Common Stock that are the subject of a Restricted Stock Award shall be subject
to restrictions on disposition by the Holder and an obligation of the Holder to
forfeit and surrender the shares to the Company under certain circumstances (the
"Forfeiture Restrictions"). The Forfeiture Restrictions shall be determined by
the Committee in its sole discretion, and the Committee may provide that the
Forfeiture Restrictions shall lapse upon (i) the attainment of one or more
performance measures
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established by the Committee that are based on (1) the price of a share of
Common Stock, (2) the Company's earnings per share, (3) the Company's market
share, (4) the market share of a business unit of the Company designated by the
Committee, (5) the Company's sales, (6) the sales of a business unit of the
Company designated by the Committee, (7) the net income (before or after taxes)
of the Company or any business unit of the Company designated by the Committee,
(8) the cash flow return on investment of the Company or any business unit of
the Company designated by the Committee, (9) the earnings before or after
interest, taxes, depreciation, and/or amortization of the Company or any
business unit of the Company designated by the Committee, (10) the economic
value added, (11) the return on stockholders' equity achieved by the Company, or
(12) the total stockholders' return achieved by the Company, (ii) the Holder's
continued employment with the Company for a specified period of time, (iii) the
occurrence of any event or the satisfaction of any other condition specified by
the Committee in its sole discretion, or (iv) a combination of any of the
foregoing. The performance measures may be subject to adjustment for specified
significant extraordinary items or events, and may be absolute, relative to one
or more other companies, or relative to one or more indexes, and may be
contingent upon future performance of the Company or any Affiliate, division, or
department thereof by or in which the Holder is employed during the performance
period. Each Restricted Stock Award may have different Forfeiture Restrictions,
in the sole discretion of the Committee.
(b) OTHER TERMS AND CONDITIONS. Common Stock awarded pursuant to a
Restricted Stock Award shall be represented by a stock certificate registered in
the name of the Holder of such Restricted Stock Award. The Holder shall have the
right to receive dividends with respect to Common Stock subject to a Restricted
Stock Award, to vote Common Stock subject thereto and to enjoy all other
stockholder rights, except that (i) the Holder shall not be entitled to delivery
of the stock certificate until the Forfeiture Restrictions have expired, (ii)
the Company shall retain custody of the stock until the Forfeiture Restrictions
have expired, (iii) the Holder may not sell, transfer, pledge, exchange,
hypothecate or otherwise dispose of the stock until the Forfeiture Restrictions
have expired, and (iv) a breach of the terms and conditions established by the
Committee pursuant to the Restricted Stock Agreement shall cause a forfeiture of
the Restricted Stock Award. At the time of such Award, the Committee may, in its
sole discretion, prescribe additional terms, conditions or restrictions relating
to Restricted Stock Awards, including, but not limited to, rules pertaining to
the termination of employment (by retirement, disability, death or otherwise) of
a Holder prior to expiration of the Forfeitures Restrictions. Such additional
terms, conditions or restrictions shall be set forth in a Restricted Stock
Agreement made in conjunction with the Award.
(c) PAYMENT FOR RESTRICTED STOCK. The Committee shall determine the amount
and form of any payment for Common Stock received pursuant to a Restricted Stock
Award, provided that in the absence of such a determination, a Holder shall not
be required to make any payment for Common Stock received pursuant to a
Restricted Stock Award, except to the extent otherwise required by law.
(d) COMMITTEE'S DISCRETION TO ACCELERATE VESTING OF RESTRICTED STOCK
AWARDS. The Committee may, in its discretion and as of a date determined by the
Committee, fully vest any or all Common Stock awarded to a Holder pursuant to a
Restricted Stock Award and, upon such vesting, all restrictions applicable to
such Restricted Stock Award shall terminate as of such date. Any action
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by the Committee pursuant to this Subparagraph may vary among individual Holders
and may vary among the Restricted Stock Awards held by any individual Holder.
Notwithstanding the preceding provisions of this Subparagraph, the Committee may
not take any action described in this Subparagraph with respect to a Restricted
Stock Award that has been granted to a "covered employee" (within the meaning of
Treasury Regulation section 1.162-27(c)(2)) if such Award has been designed to
meet the exception for performance-based compensation under section 162(m) of
the Code.
(e) RESTRICTED STOCK AGREEMENTS. At the time any Award is made under this
Paragraph VIII, the Company and the Holder shall enter into a Restricted Stock
Agreement setting forth each of the matters contemplated hereby and such other
matters as the Committee may determine to be appropriate. The terms and
provisions of the respective Restricted Stock Agreements need not be identical.
IX. PERFORMANCE AWARDS
(a) PERFORMANCE PERIOD. The Committee shall establish, with respect to and
at the time of each Performance Award, the number of shares of Common Stock
subject to, or the maximum value of, the Performance Award and the performance
period over which the performance applicable to the Performance Award shall be
measured.
(b) PERFORMANCE MEASURES. A Performance Award shall be awarded to a Holder
contingent upon future performance of the Company or any Affiliate, division, or
department thereof by or in which such Holder is employed during the performance
period. The Committee shall establish the performance measures applicable to
such performance either (I) prior to the beginning of the performance period or
(II) within ninety days after the beginning of the performance period if the
outcome of the performance targets is substantially uncertain at the time such
targets are established, but not later than the date that 25% of the performance
period has elapsed; provided such measures may be made subject to adjustment for
specified significant extraordinary items or events. The performance measures
may be absolute, relative to one or more other companies, or relative to one or
more indexes. The performance measures established by the Committee may be based
upon (i) the price of a share of Common Stock, (ii) the Company's earnings per
share, (iii) the Company's market share, (iv) the market share of a business
unit of the Company designated by the Committee, (v) the Company's sales, (vi)
the sales of a business unit of the Company designated by the Committee, (vii)
the net income (before or after taxes) of the Company or any business unit of
the Company designated by the Committee, (viii) the cash flow return on
investment of the Company or any business unit of the Company designated by the
Committee, (ix) the earnings before or after interest, taxes, depreciation,
and/or amortization of the Company or any business unit of the Company
designated by the Committee, (x) the economic value added, (xi) the return on
stockholders' equity achieved by the Company, (xii) the total stockholders'
return achieved by the Company, or (xiii) a combination of any of the foregoing.
The Committee, in its sole discretion, may provide for an adjustable Performance
Award value based upon the level of achievement of performance measures.
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(c) AWARDS CRITERIA. In determining the value of Performance Awards, the
Committee shall take into account a Holder's responsibility level, performance,
potential, other Awards, and such other considerations as it deems appropriate.
The Committee, in its sole discretion, may provide for a reduction in the value
of a Holder's Performance Award during the performance period.
(d) PAYMENT. Following the end of the performance period, the Holder of a
Performance Award shall be entitled to receive payment of an amount not
exceeding the number of shares of Common Stock subject to or the maximum value
of the Performance Award, based on the achievement of the performance measures
for such performance period, as determined by the Committee. Payment of a
Performance Award may be made in cash, Common Stock, or a combination thereof,
as determined by the Committee. Payment shall be made in a lump sum or in
installments as prescribed by the Committee. If a Performance Award covering
shares of Common Stock is to be paid in cash, such payment shall be based on the
Fair Market Value of the Common Stock on the payment date.
(e) TERMINATION OF AWARD. A Performance Award shall terminate if the Holder
does not remain continuously in the employ of the Company and its Affiliates at
all times during the applicable performance period, except as may be determined
by the Committee.
(f) PERFORMANCE AWARD AGREEMENTS. At the time any Award is made under this
Paragraph IX, the Company and the Holder shall enter into a Performance Award
Agreement setting forth each of the matters contemplated hereby, and such
additional matters as the Committee may determine to be appropriate. The terms
and provisions of the respective Performance Award Agreements need not be
identical.
X. PHANTOM STOCK AWARDS
(a) PHANTOM STOCK AWARDS. Phantom Stock Awards are rights to receive shares
of Common Stock (or the Fair Market Value thereof), or rights to receive an
amount equal to any appreciation or increase in the Fair Market Value of Common
Stock over a specified period of time, which vest over a period of time as
established by the Committee, without satisfaction of any performance criteria
or objectives. The Committee may, in its discretion, require payment or other
conditions of the Holder respecting any Phantom Stock Award.
(b) AWARD PERIOD. The Committee shall establish, with respect to and at the
time of each Phantom Stock Award, a period over which the Award shall vest with
respect to the Holder.
(c) AWARDS CRITERIA. In determining the value of Phantom Stock Awards, the
Committee shall take into account a Holder's responsibility level, performance,
potential, other Awards, and such other considerations as it deems appropriate.
(d) PAYMENT. Following the end of the vesting period for a Phantom Stock
Award (or at such other time as the applicable Phantom Stock Award Agreement may
provide), the Holder of a Phantom Stock Award shall be entitled to receive
payment of an amount, not exceeding the
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maximum value of the Phantom Stock Award, based on the then vested value of the
Award. Payment of a Phantom Stock Award may be made in cash, Common Stock, or a
combination thereof as determined by the Committee. Payment shall be made in a
lump sum or in installments as prescribed by the Committee. Any payment to be
made in cash shall be based on the Fair Market Value of the Common Stock on the
payment date. Cash dividend equivalents may be paid during or after the vesting
period with respect to a Phantom Stock Award, as determined by the Committee.
(e) TERMINATION OF AWARD. A Phantom Stock Award shall terminate if the
Holder does not remain continuously in the employ of the Company and its
Affiliates at all times during the applicable vesting period, except as may be
otherwise determined by the Committee.
(f) PHANTOM STOCK AWARD AGREEMENTS. At the time any Award is made under
this Paragraph X, the Company and the Holder shall enter into a Phantom Stock
Award Agreement setting forth each of the matters contemplated hereby, and such
additional matters as the Committee may determine to be appropriate. The terms
and provisions of the respective Phantom Stock Award Agreements need not be
identical.
XI. RECAPITALIZATION OR REORGANIZATION
(a) NO EFFECT ON RIGHT OR POWER. The existence of the Plan and the Awards
granted hereunder shall not affect in any way the right or power of the Board or
the stockholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's or any
Affiliate's capital structure or its business, any merger or consolidation of
the Company or any Affiliate, any issue of debt or equity securities ahead of or
affecting Common Stock or the rights thereof, the dissolution or liquidation of
the Company or any Affiliate 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) SUBDIVISION OR CONSOLIDATION OF SHARES; STOCK DIVIDENDS. The shares
with respect to which Awards may be granted are shares of Common Stock as
presently constituted, but if, and whenever, prior to the expiration of an Award
theretofore granted, the Company shall effect a subdivision or consolidation of
shares of Common Stock or the payment of a stock dividend on Common Stock
without receipt of consideration by the Company, the number of shares of Common
Stock with respect to which such Award may thereafter be exercised or satisfied,
as applicable (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. Any factional share
resulting from such adjustment shall be rounded down to the next whole share.
(c) RECAPITALIZATIONS AND CORPORATE CHANGES. If the Company recapitalizes,
reclassifies its capital stock, or otherwise changes its capital structure (a
"recapitalization"), the number and class of shares of Common Stock covered by
an Award theretofore granted shall be adjusted so that such Award shall
thereafter cover the number and class of shares of stock and
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securities to which the Holder would have been entitled pursuant to the terms of
the recapitalization if, immediately prior to the recapitalization, the Holder
had been the holder of record of the number of shares of Common Stock then
covered by such Award. If (i) the Company shall not be the surviving entity in
any merger or consolidation (or survives only as a subsidiary of an entity),
(ii) the Company sells, leases or exchanges or agrees to sell, lease or exchange
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 (x) ten days after the
approval by the stockholders of the Company of such merger, consolidation,
reorganization, sale, lease or exchange of assets or dissolution or such
election of Directors or (y) thirty days after a Corporate Change of the type
described in clause (iv), the Committee, acting in its sole discretion without
the consent or approval of any Holder, shall effect one or more of the following
alternatives, which alternatives may vary among individual Holders and which may
vary among Options held by any individual Holder: (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 and all rights of Holders thereunder
shall terminate, (2) require the mandatory surrender to the Company by selected
Holders of some or all of the outstanding Options held by such Holders
(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 (or cause to be paid) to each Holder 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 (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 Common 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 Holder
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 Holder had been the
holder of record of the number of shares of Common Stock then covered by such
Option.
(d) CHANGE OF CONTROL VALUE. 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 stockholders of the Company in any such merger,
consolidation, sale of assets or dissolution transaction, (ii) the price per
share offered to stockholders 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
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<PAGE> 12
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 stockholders 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) OTHER CHANGES IN THE COMMON STOCK. In the event of changes in the
outstanding Common Stock by reason of recapitalizations, reorganizations,
mergers, consolidations, combinations, split-ups, split-offs, spin-offs,
exchanges or other relevant changes in capitalization or distributions to the
holders of Common Stock occurring after the date of the grant of any Award and
not otherwise provided for by this Paragraph XI, such Award and any agreement
evidencing such Award shall be subject to adjustment by the Committee at its
sole discretion as to the number and price of shares of Common Stock or other
consideration subject to such Award. In the event of any such change in the
outstanding Common Stock or distribution to the holders of Common Stock, the
aggregate number of shares available under the Plan and the maximum number of
shares that may be subject to Awards granted to any one individual may be
appropriately adjusted by the Committee, whose determination shall be
conclusive. Notwithstanding the foregoing, upon the occurrence of a Corporate
Change, the Committee, acting in its sole discretion without the consent or
approval of any Holder, may require the mandatory surrender to the Company by
selected Holders of some or all of the outstanding Performance Awards and
Phantom Stock Awards as of a date, before or after such Corporate Change,
specified by the Committee, in which event the Committee shall thereupon cancel
such Performance Awards and Phantom Stock Awards and the Company shall pay (or
cause to be paid) to each Holder an amount of cash equal to the maximum value of
such Performance Award or Phantom Stock Award which, in the event the applicable
performance or vesting period set forth in such Performance Award or Phantom
Stock Award has not been completed, shall be multiplied by a fraction, the
numerator of which is the number of days during the period beginning on the
first day of the applicable performance or vesting period and ending on the date
of the surrender, and the denominator of which is the aggregate number of days
in the applicable performance or vesting period.
(f) STOCKHOLDER ACTION. Any adjustment provided for in the above
Subparagraphs shall be subject to any required stockholder action.
(g) NO ADJUSTMENTS UNLESS OTHERWISE PROVIDED. 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 Common Stock subject to Awards
theretofore granted or the purchase price per share, if applicable.
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XII. AMENDMENT AND TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with respect
to any shares of Common Stock for which Awards have not theretofore been
granted. The Board shall have the right to alter or amend the Plan or any part
thereof from time to time; provided that no change in any Award theretofore
granted may be made which would impair the rights of the Holder without the
consent of the Holder, and provided, further, that the Board may not, without
approval of the stockholders, amend the Plan to (a) increase the maximum
aggregate number of shares that may be issued under the Plan or (b) change the
class of individuals eligible to receive Awards under the Plan.
XIII. MISCELLANEOUS
(a) NO RIGHT TO AN AWARD. Neither the adoption of the Plan nor any action
of the Board or of the Committee shall be deemed to give an employee any right
to be granted an Option, a right to a Restricted Stock Award, a right to a
Performance Award or a right to a Phantom Stock Award, or any other rights
hereunder except as may be evidenced by an Award agreement duly executed on
behalf of the Company, and then only to the extent and on the terms and
conditions expressly set forth therein. The Plan shall be unfunded. The Company
shall not be required to establish any special or separate fund or to make any
other segregation of funds or assets to assure the performance of its
obligations under any Award.
(b) NO EMPLOYMENT RIGHTS CONFERRED. Nothing contained in the Plan shall (i)
confer upon any employee any right with respect to continuation of employment
with the Company or any Affiliate or (ii) interfere in any way with the right of
the Company or any Affiliate to terminate his or her employment relationship at
any time.
(c) OTHER LAWS; WITHHOLDING. The Company shall not be obligated to issue
any Common Stock pursuant to any Award granted under the Plan at any time when
the shares covered by such Award have not been registered under the Securities
Act of 1933, as amended, and such other state and federal laws, rules and
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 and regulations available for the issuance and
sale of such shares. No fractional shares of Common Stock shall be delivered,
nor shall any cash in lieu of fractional shares be paid. The Company shall have
the right to deduct in connection with all Awards any taxes required by law to
be withheld and to require any payments required to enable it to satisfy its
withholding obligations.
(d) NO RESTRICTION ON CORPORATE ACTION. Nothing contained in the Plan shall
be construed to prevent the Company or any Affiliate from taking any action
which is deemed by the Company or such Affiliate to be appropriate or in its
best interest, whether or not such action would have an adverse effect on the
Plan or any Award made under the Plan. No employee, beneficiary or other person
shall have any claim against the Company or any Affiliate as a result of any
such action.
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<PAGE> 14
(e) RESTRICTIONS ON TRANSFER. An Award (other than an Incentive Stock
Option, which shall be subject to the transfer restrictions set forth in
Paragraph VII(c)) shall not be transferable otherwise than (i) by will or the
laws of descent and distribution, (ii) 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, or (iii) with
the consent of the Committee.
(f) GOVERNING LAW. THE PLAN SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF DELAWARE.
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EXHIBIT 10.7
DYNEGY INC.
2000 LONG TERM INCENTIVE PLAN
I. PURPOSE
The purpose of the DYNEGY INC. 2000 LONG TERM INCENTIVE PLAN (the "Plan")
is to provide a means through which Energy Convergence Holding Company (to be
renamed Dynegy Inc.), an Illinois corporation (the "Company"), and its
subsidiaries may attract able persons to enter the employ of the Company and its
affiliates and to provide a means whereby those individuals upon whom the
responsibilities of the successful administration and management of the Company
and its affiliates rest, and whose present and potential contributions to the
welfare of the Company and its affiliates are of importance, can acquire and
maintain stock ownership, thereby strengthening their concern for the welfare of
the Company and its affiliates.
A further purpose of the Plan is to provide such individuals with
additional incentive and reward opportunities designed to enhance the profitable
growth of the Company and its affiliates. Accordingly, the Plan provides for
granting Incentive Stock Options, options that do not constitute Incentive Stock
Options, Restricted Stock Awards, Performance Awards, and Phantom Stock Awards,
or any combination of the foregoing, as is best suited to the circumstances of
the particular employee as provided herein.
II. DEFINITIONS
The following definitions shall be applicable throughout the Plan unless
specifically modified by any paragraph:
"Affiliate" means 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.
"Award" means, individually or collectively, any Option, Restricted Stock
Award, Performance Award or Phantom Stock Award.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended. Reference in
the Plan to any section of the Code shall be deemed to include any amendments or
successor provisions to such section and any regulations under such section.
"Committee" means a committee of the Board that is selected by the Board as
provided in Paragraph IV(a).
"Common Stock" means the Class A common stock, no par value per share, of
the Company, or any security into which such common stock may be changed by
reason of any transaction or event of the type described in Paragraph XI.
"Company" means Energy Convergence Holding Company, an Illinois
corporation.
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"Director" means an individual elected to the Board by the stockholders of
the Company or by the Board under applicable corporate law who is serving on the
Board on the date the Plan is adopted by the Board or is elected to the Board
after such date.
An "employee" means any person (including a Director) in an employment
relationship with the Company or any Affiliate.
"Fair Market Value" means, as of any specified date, the closing sales
price of the Common Stock reported on the stock exchange composite tape on that
date, or, if no prices are reported on that date, on the last preceding date on
which such prices of the Common Stock are so reported. In the event Common Stock
is not publicly traded at the time a determination of its value is required to
be made hereunder, the determination of its fair market value shall be made by
the Committee in such manner as it deems appropriate.
"Holder" means an employee who has been granted an Award.
"Incentive Stock Option" means an incentive stock option within the meaning
of section 422 of the Code.
"Non-Employee Director" means a Director who is not employed by the Company
or any of its subsidiaries;.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"Option" means an Award granted under Paragraph VII of the Plan and
includes both Incentive Stock Options to purchase Common Stock and Options that
do not constitute Incentive Stock Options to purchase Common Stock.
"Option Agreement" means a written agreement between the Company and a
Holder with respect to an Option.
"Performance Award" means an Award granted under Paragraph IX of the Plan.
"Performance Award Agreement" means a written agreement between the Company
and a Holder with respect to a Performance Award.
"Phantom Stock Award" means an Award granted under Paragraph X of the Plan.
"Phantom Stock Award Agreement" means a written agreement between the
Company and a Holder with respect to a Phantom Stock Award.
"Plan" means the Dynegy Inc. 2000 Long Term Incentive Plan, as amended from
time to time.
"Restricted Stock Agreement" means a written agreement between the Company
and a Holder with respect to a Restricted Stock Award.
"Restricted Stock Award" means an Award granted under Paragraph VIII of the
Plan.
"Rule 16b-3" means SEC Rule 16b-3 promulgated under the 1934 Act, as such
may be amended from time to time, and any successor rule, regulation or statute
fulfilling the same or a similar function.
"Stock Appreciation Right" shall have the meaning assigned to such term in
Paragraph VII(d) of the Plan.
III. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall become effective upon the Effective Time under the Agreement
and Plan of Merger dated June 14, 1999, among the Company, Dynegy Inc., Illinova
Corporation, Dynegy Acquisition Corporation and Energy Convergence Acquisition
Corporation (the "Merger Agreement"). Notwithstanding any provision in the Plan,
no Option shall be exercisable and no Award shall vest or become satisfiable
prior to such stockholder approval. No
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further Awards may be granted under the Plan after ten years from the Effective
Time under the Merger Agreement. The Plan shall remain in effect until all
Options granted under the Plan have been exercised or expired, all Restricted
Stock Awards granted under the Plan have vested or been forfeited, and all
Performance Awards and Phantom Stock Awards have been satisfied or expired.
IV. ADMINISTRATION
(a) Composition of Committee. The Plan shall be administered by a committee
of, and appointed by, the Board, and such committee shall be comprised of two or
more outside Directors (within the meaning of the term "outside directors" as
used in section 162(m) of the Code and applicable interpretive authority
thereunder and within the meaning of "Non-Employee Director" as defined in Rule
16b-3).
(b) Powers. Subject to the express provisions of the Plan, the Committee
shall have authority, in its sole discretion, to determine which employees shall
receive an Award, the time or times when such Award shall be made, whether an
Incentive Stock Option or nonqualified Option shall be granted, and the number
of shares to be subject to each Option or Restricted Stock Award, the number of
shares subject to or the value of each Performance Award, and the value of each
Phantom Stock Award. In making such determinations, the Committee shall take
into account the nature of the services rendered by the respective employees,
their present and potential contribution to the Company's success and such other
factors as the Committee in its sole discretion shall deem relevant.
(c) Additional Powers. The Committee shall have such additional powers as
are delegated to it by the other provisions of the Plan. Subject to the express
provisions of the Plan, this shall include the power to construe the Plan and
the respective agreements executed hereunder, to prescribe rules and regulations
relating to the Plan, and to determine the terms, restrictions and provisions of
the agreement relating to each Award, including such terms, restrictions and
provisions as shall be requisite in the judgment of the Committee to cause
designated Options to qualify as Incentive Stock Options, and to make all other
determinations necessary or advisable for administering the Plan. The Committee
may correct any defect or supply any omission or reconcile any inconsistency in
the Plan or in any agreement relating to an Award in the manner and to the
extent it shall deem expedient to carry it into effect. The determinations of
the Committee on the matters referred to in this Paragraph IV shall be
conclusive.
V. SHARES SUBJECT TO THE PLAN; GRANT OF OPTIONS; GRANT OF RESTRICTED STOCK
AWARDS
(a) Shares Subject to the Plan and Award Limits. Subject to adjustment in
the same manner as provided in Paragraph XI with respect to shares of Common
Stock subject to Options then outstanding, the aggregate number of shares of
Common Stock that may be issued under the Plan shall not exceed 5,000,000
shares. Shares shall be deemed to have been issued under the Plan only to the
extent actually issued and delivered pursuant to an Award. To the extent that an
Award lapses or the rights of its Holder terminate, any shares of Common Stock
subject to such Award shall again be available for the grant of an Award under
the Plan. Notwithstanding any provision in the Plan to the contrary, the maximum
number of shares of Common Stock that may be subject to Options, Restricted
Stock Awards (subject to performance forfeiture restrictions described in
Paragraph VIII) and Performance Awards denominated in shares of Common Stock
granted to any one individual during any calendar year may not exceed 1,000,000
shares of Common Stock (subject to adjustment in the same manner as provided in
Paragraph XI with respect to shares of Common Stock subject to Options then
outstanding) and the maximum value of any Performance Award denominated in cash
(including the Fair Market Value of any shares of Common Stock paid in
satisfaction of such Performance Award) granted to any one individual during any
calendar year may not exceed $5,000,000. The limitations set forth in the
preceding sentence shall be applied in a manner which will permit compensation
generated under the Plan to constitute "performance-based" compensation for
purposes of section 162(m) of the Code, including, without limitation, counting
against such maximum number of shares, to the extent required under section
162(m) of the Code and applicable interpretive authority thereunder, any shares
subject to Options that are canceled or repriced.
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(b) Grant of Awards. The Committee may from time to time grant Awards to
one or more employees determined by it to be eligible for participation in the
Plan in accordance with the terms of the Plan.
(c) Stock Offered. Subject to the limitations set forth in Paragraph
V(a),the stock to be offered pursuant to the grant of an Award may be authorized
but unissued Common Stock or Common Stock previously issued and outstanding and
reacquired by the Company. Any of such shares which remain unissued and which
are not subject to outstanding Awards 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.
VI. ELIGIBILITY
Awards may be granted only to persons who, at the time of grant, are
employees of the Company and its Affiliates, or Non-Employee Directors. An Award
may be granted on more than one occasion to the same person, and, subject to the
limitations set forth in the Plan, such Award may include an Incentive Stock
Option, an Option that is not an Incentive Stock Option, a Restricted Stock
Award, a Performance Award, a Phantom Stock Award, or any combination thereof.
VII. STOCK OPTIONS
(a) Option Period. The term of each Option shall be as specified by the
Committee at the date of grant.
(b) Limitations on Exercise of Option. An Option shall be exercisable in
whole or in such installments and at such times as determined by the Committee.
(c) Special Limitations on Incentive Stock Options. An Incentive Stock
Option may be granted only to an individual who is employed by the Company or
any parent or subsidiary corporation (as defined in section 424 of the Code) at
the time the Option is granted. To the extent that the aggregate Fair Market
Value (determined at the time the respective Incentive Stock Option is granted)
of Common Stock with respect to which Incentive Stock Options granted after 1986
are exercisable for the first time by an individual during any calendar year
under all incentive stock option plans of the Company and its parent and
subsidiary corporations exceeds $100,000, such Incentive Stock Options shall be
treated as Options which do not constitute Incentive Stock Options. The
Committee shall determine, in accordance with applicable provisions of the Code,
Treasury Regulations and other administrative pronouncements, which of a
Holder's Incentive Stock Options will not constitute Incentive Stock Options
because of such limitation and shall notify the Holder of such determination as
soon as practicable after such determination. No Incentive Stock Option shall be
granted to an individual if, at the time the Option is granted, such individual
owns stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or of its parent or subsidiary corporation,
within the meaning of section 422(b)(6) of the Code, unless (i) at the time such
Option is granted the option price is at least 110% of the Fair Market Value of
the Common Stock subject to the Option and (ii) such Option by its terms is not
exercisable after the expiration of five years from the date of grant. An
Incentive Stock Option shall not be transferable otherwise than by will or the
laws of descent and distribution, and shall be exercisable during the Holder's
lifetime only by such Holder or the Holder's guardian or legal representative.
(d) Option Agreement. Each Option shall be evidenced by an Option Agreement
in such form and containing such provisions not inconsistent with the provisions
of the Plan as the Committee from time to time shall approve, including, without
limitation, provisions to qualify an Incentive Stock Option under section 422 of
the Code. Each Option Agreement shall specify the effect of termination of
employment on the exercisability of the Option. An Option Agreement may provide
for the payment of the option price, in whole or in part, by the delivery of a
number of shares of Common Stock (plus cash if necessary) having a Fair Market
Value equal to such option price. Moreover, an Option Agreement may provide for
a "cashless exercise" of the Option by establishing procedures satisfactory to
the Committee with respect thereto. Further, an Option Agreement may provide for
the surrender of
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the right to purchase shares under the Option in return for a payment in cash or
shares of Common Stock or a combination of cash and shares of Common Stock equal
in value to the excess of the Fair Market Value of the shares with respect to
which the right to purchase is surrendered over the option price therefor
("Stock Appreciation Rights"), on such terms and conditions as the Committee in
its sole discretion may prescribe. In the case of any such Stock Appreciation
Right that is granted in connection with an Incentive Stock Option, such right
shall be exercisable only when the Fair Market Value of the Common Stock exceeds
the price specified therefor in the Option or the portion thereof to be
surrendered. The terms and conditions of the respective Option Agreements need
not be identical.
(e) Option Price and Payment. The price at which a share of Common Stock
may be purchased upon exercise of an Option shall be determined by the Committee
but, in the case of Incentive Stock Options only, subject to adjustment as
provided in Paragraph XI shall not be less than the Fair Market Value of a share
of Common Stock on the date such Incentive Stock Option is granted. The Option
or portion thereof may be exercised by delivery of an irrevocable notice of
exercise to the Company, as specified by the Committee. The purchase price of
the Option or portion thereof shall be paid in full in the manner prescribed by
the Committee. Separate stock certificates shall be issued by the Company for
those shares acquired pursuant to the exercise of an Incentive Stock Option and
for those shares acquired pursuant to the exercise of any Option that does not
constitute an Incentive Stock Option.
(f) Stockholder Rights and Privileges. The Holder shall be entitled to all
the privileges and rights of a stockholder only with respect to such shares of
Common Stock as have been purchased under the Option and for which certificates
of stock have been registered in the Holder's name.
(g) Options and Rights in Substitution for Stock Options Granted by Other
Corporations. Options and Stock Appreciation Rights may be granted under the
Plan from time to time in substitution for stock options held by individuals
employed by corporations who become employees as a result of a merger or
consolidation or other business combination of the employing corporation with
the Company or any Affiliate.
(h) Non-Employee Director Option Grants. Upon his or her election or
appointment as a Director, each Non-Employee Director shall receive, without any
further action on the part of the Committee, the award of an Option to purchase
3,000 shares of Common Stock, which Option shall (i) be priced at Fair Market
Value, (ii) vest and become exercisable on the first anniversary of the date of
grant, and (iii) with respect to any unexercised portion thereof, automatically
and without further notice, terminate and become null and void on the tenth
anniversary of the date of grant of such Option or on the third anniversary of
the date such Director's service on the Board terminates. Each Option shall be
evidenced by an Option Agreement. In the event a Director is unable to, or
chooses not to, accept the Award, he or she should decline to execute the Option
Agreement.
VIII. RESTRICTED STOCK AWARDS
(a) Forfeiture Restrictions To Be Established by the Committee. Shares of
Common Stock that are the subject of a Restricted Stock Award shall be subject
to restrictions on disposition by the Holder and an obligation of the Holder to
forfeit and surrender the shares to the Company under certain circumstances(the
"Forfeiture Restrictions"). The Forfeiture Restrictions shall be determined by
the Committee in its sole discretion, and the Committee may provide that the
Forfeiture Restrictions shall lapse upon
(i) the attainment of one or more performance measures established by
the Committee that are based on:
(1) the price of a share of Common Stock,
(2) the Company's earnings per share,
(3) the Company's market share,
(4) the market share of a business unit of the Company designated
by the Committee,
(5) the Company's sales,
(6) the sales of a business unit of the Company designated by the
Committee,
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(7) the net income (before or after taxes) of the Company or any
business unit of the Company designated by the Committee,
(8) the cash flow return on investment of the Company or any
business unit of the Company designated by the Committee,
(9) the earnings before or after interest, taxes, depreciation,
and/or amortization of the Company or any business unit of the Company
designated by the Committee,
(10) the economic value added,
(11) the return on stockholders' equity achieved by the Company,
or
(12) the total stockholders' return achieved by the Company,
(ii) the Holder's continued employment with the Company for a
specified period of time,
(iii) the occurrence of any event or the satisfaction of any other
condition specified by the Committee in its sole discretion, or
(iv) a combination of any of the foregoing. The performance measures
may be subject to adjustment for specified significant extraordinary items
or events, and may be absolute, relative to one or more other companies, or
relative to one or more indexes, and may be contingent upon future
performance of the Company or any Affiliate, division, or department
thereof by or in which the Holder is employed during the performance
period. Each Restricted Stock Award may have different Forfeiture
Restrictions, in the sole discretion of the Committee.
(b) Other Terms and Conditions. Common Stock awarded pursuant to a
Restricted Stock Award shall be represented by a stock certificate registered in
the name of the Holder of such Restricted Stock Award. The Holder shall have the
right to receive dividends with respect to Common Stock subject to a Restricted
Stock Award, to vote Common Stock subject thereto and to enjoy all other
stockholder rights, except that
(i) the Holder shall not be entitled to delivery of the stock
certificate until the Forfeiture Restrictions have expired,
(ii) the Company shall retain custody of the stock until the
Forfeiture Restrictions have expired,
(iii) the Holder may not sell, transfer, pledge, exchange, hypothecate
or otherwise dispose of the stock until the Forfeiture Restrictions have
expired, and (iv) a breach of the terms and conditions established by the
Committee pursuant to the Restricted Stock Agreement shall cause a
forfeiture of the Restricted Stock Award. At the time of such Award, the
Committee may, in its sole discretion, prescribe additional terms,
conditions or restrictions relating to Restricted Stock Awards, including,
but not limited to, rules pertaining to the termination of employment (by
retirement, disability, death or otherwise) of a Holder prior to expiration
of the Forfeitures Restrictions. Such additional terms, conditions or
restrictions shall be set forth in a Restricted Stock Agreement made in
conjunction with the Award.
(c) Payment for Restricted Stock. The Committee shall determine the amount
and form of any payment for Common Stock received pursuant to a Restricted Stock
Award, provided that in the absence of such a determination, a Holder shall not
be required to make any payment for Common Stock received pursuant to a
Restricted Stock Award, except to the extent otherwise required by law.
(d) Committee's Discretion to Accelerate Vesting of Restricted Stock
Awards. The Committee may, in its discretion and as of a date determined by the
Committee, fully vest any or all Common Stock awarded to a Holder pursuant to a
Restricted Stock Award and, upon such vesting, all restrictions applicable to
such Restricted Stock Award shall terminate as of such date. Any action by the
Committee pursuant to this Subparagraph may vary among individual Holders and
may vary among the Restricted Stock Awards held by any individual Holder.
Notwithstanding the preceding provisions of this Subparagraph, the Committee may
not take any action described in this Subparagraph with respect to a Restricted
Stock Award that has been granted to a "covered employee" (within the meaning of
Treasury Regulation section 1.162-27(c)(2)) if such Award has been designed to
meet the exception for performance-based compensation under section 162(m) of
the Code.
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(e) Restricted Stock Agreements. At the time any Award is made under this
Paragraph VIII, the Company and the Holder shall enter into a Restricted Stock
Agreement setting forth each of the matters contemplated hereby and such other
matters as the Committee may determine to be appropriate. The terms and
provisions of the respective Restricted Stock Agreements need not be identical.
IX. PERFORMANCE AWARDS
(a) Performance Period. The Committee shall establish, with respect to and
at the time of each Performance Award, the number of shares of Common Stock
subject to, or the maximum value of, the Performance Award and the performance
period over which the performance applicable to the Performance Award shall be
measured.
(b) Performance Measures. A Performance Award shall be awarded to a Holder
contingent upon future performance of the Company or any Affiliate, division, or
department thereof by or in which such Holder is employed during the performance
period. The Committee shall establish the performance measures applicable to
such performance either (I) prior to the beginning of the performance period or
(II) within ninety days after the beginning of the performance period if the
outcome of the performance targets is substantially uncertain at the time such
targets are established, but not later than the date that 25% of the performance
period has elapsed; provided such measures may be made subject to adjustment for
specified significant extraordinary items or events. The performance measures
may be absolute, relative to one or more other companies, or relative to one or
more indexes. The performance measures established by the Committee may be based
upon
(i) the price of a share of Common Stock,
(ii) the Company's earnings per share,
(iii) the Company's market share,
(iv) the market share of a business unit of the Company designated by
the Committee,
(v) the Company's sales,
(vi) the sales of a business unit of the Company designated by the
Committee,
(vii) the net income (before or after taxes) of the Company or any
business unit of the Company designated by the Committee,
(viii) the cash flow return on investment of the Company or any
business unit of the Company designated by the Committee,
(ix) the earnings before or after interest, taxes, depreciation,
and/or amortization of the Company or any business unit of the Company
designated by the Committee,
(x) the economic value added,
(xi) the return on stockholders' equity achieved by the Company,
(xii) the total stockholders' return achieved by the Company, or
(xiii) a combination of any of the foregoing. The Committee, in its
sole discretion, may provide for an adjustable Performance Award value
based upon the level of achievement of performance measures.
(c) Awards Criteria. In determining the value of Performance Awards, the
Committee shall take into account a Holder's responsibility level, performance,
potential, other Awards, and such other considerations as it deems appropriate.
The Committee, in its sole discretion, may provide for a reduction in the value
of a Holder's Performance Award during the performance period.
(d) Payment. Following the end of the performance period, the Holder of a
Performance Award shall be entitled to receive payment of an amount not
exceeding the number of shares of Common Stock subject to or the maximum value
of the Performance Award, based on the achievement of the performance measures
for such performance period, as determined by the Committee. Payment of a
Performance Award may be made in cash, Common Stock, or a combination thereof,
as determined by the Committee. Payment shall be made in a lump sum
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or in installments as prescribed by the Committee. If a Performance Award
covering shares of Common Stock is to be paid in cash, such payment shall be
based on the Fair Market Value of the Common Stock on the payment date.
(e) Termination of Award. A Performance Award shall terminate if the Holder
does not remain continuously in the employ of the Company and its Affiliates at
all times during the applicable performance period, except as may be determined
by the Committee.
(f) Performance Award Agreements. At the time any Award is made under this
Paragraph IX, the Company and the Holder shall enter into a Performance Award
Agreement setting forth each of the matters contemplated hereby, and such
additional matters as the Committee may determine to be appropriate. The terms
and provisions of the respective Performance Award Agreements need not be
identical.
X. PHANTOM STOCK AWARDS
(a) Phantom Stock Awards. Phantom Stock Awards are rights to receive shares
of Common Stock (or the Fair Market Value thereof), or rights to receive an
amount equal to any appreciation or increase in the Fair Market Value of Common
Stock over a specified period of time, which vest over a period of time as
established by the Committee, without satisfaction of any performance criteria
or objectives. The Committee may, in its discretion, require payment or other
conditions of the Holder respecting any Phantom Stock Award.
(b) Award Period. The Committee shall establish, with respect to and at the
time of each Phantom Stock Award, a period over which the Award shall vest with
respect to the Holder.
(c) Awards Criteria. In determining the value of Phantom Stock Awards, the
Committee shall take into account a Holder's responsibility level, performance,
potential, other Awards, and such other considerations as it deems appropriate.
(d) Payment. Following the end of the vesting period for a Phantom Stock
Award (or at such other time as the applicable Phantom Stock Award Agreement may
provide), the Holder of a Phantom Stock Award shall be entitled to receive
payment of an amount, not exceeding the maximum value of the Phantom Stock
Award, based on the then vested value of the Award. Payment of a Phantom Stock
Award may be made in cash, Common Stock, or a combination thereof as determined
by the Committee. Payment shall be made in a lump sum or in installments as
prescribed by the Committee. Any payment to be made in cash shall be based on
the Fair Market Value of the Common Stock on the payment date. Cash dividend
equivalents may be paid during or after the vesting period with respect to a
Phantom Stock Award, as determined by the Committee.
(e) Termination of Award. A Phantom Stock Award shall terminate if the
Holder does not remain continuously in the employ of the Company and its
Affiliates at all times during the applicable vesting period, except as may be
otherwise determined by the Committee.
(f) Phantom Stock Award Agreements. At the time any Award is made under
this Paragraph X, the Company and the Holder shall enter into a Phantom Stock
Award Agreement setting forth each of the matters contemplated hereby, and such
additional matters as the Committee may determine to be appropriate. The terms
and provisions of the respective Phantom Stock Award Agreements need not be
identical.
XI. RECAPITALIZATION OR REORGANIZATION
(a) No Effect on Right or Power. The existence of the Plan and the Awards
granted hereunder shall not affect in any way the right or power of the Board or
the stockholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's or any
Affiliate's capital structure or its business, any merger or consolidation of
the Company or any Affiliate, any issue of debt or equity securities ahead of or
affecting Common Stock or the rights thereof, the dissolution or liquidation of
the Company or any Affiliate or any
VI-8
<PAGE> 9
sale, lease, exchange or other disposition of all or any part of its assets or
business or any other corporate act or proceeding.
(b) Subdivision or Consolidation of Shares; Stock Dividends. The shares
with respect to which Awards may be granted are shares of Common Stock as
presently constituted, but if, and whenever, prior to the expiration of an Award
theretofore granted, the Company shall effect a subdivision or consolidation of
shares of Common Stock or the payment of a stock dividend on Common Stock
without receipt of consideration by the Company, the number of shares of Common
Stock with respect to which such Award may thereafter be exercised or satisfied,
as applicable
(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. Any factional share resulting from such
adjustment shall be rounded down to the next whole share.
(c) Recapitalizations and Corporate Changes. If the Company recapitalizes,
reclassifies its capital stock, or otherwise changes its capital structure (a
"recapitalization"), the number and class of shares of Common Stock covered by
an Award theretofore granted shall be adjusted so that such Award shall
thereafter cover the number and class of shares of stock and securities to which
the Holder would have been entitled pursuant to the terms of there
capitalization if, immediately prior to the recapitalization, the Holder had
been the holder of record of the number of shares of Common Stock then covered
by such Award. If (i) the Company shall not be the surviving entity in any
merger or consolidation (or survives only as a subsidiary of an entity), (ii)
the Company sells, leases or exchanges or agrees to sell, lease or exchange 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 (x) ten days after the
approval by the stockholders of the Company of such merger, consolidation,
reorganization, sale, lease or exchange of assets or dissolution or such
election of Directors or (y) thirty days after a Corporate Change of the type
described in clause (iv), the Committee, acting in its sole discretion without
the consent or approval of any Holder, shall effect one or more of the following
alternatives, which alternatives may vary among individual Holders and which may
vary among Options held by any individual Holder:
(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 and all rights of Holders thereunder shall terminate,
(2) require the mandatory surrender to the Company by selected Holders
of some or all of the outstanding Options held by such Holders
(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 (or cause to be
paid) to each Holder 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 (provided, however, that
the Committee may determine in its sole discretion that no adjustment is
necessary to Options then outstanding), or
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(4) provide that the number and class of shares of Common 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 Holder 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
Holder had been the holder of record of the number of shares of Common
Stock then covered by such Option.
(d) Change of Control Value. 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 stockholders of the Company in any
such merger, consolidation, sale of assets or dissolution transaction,
(ii) the price per share offered to stockholders 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 stockholders 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) Other Changes in the Common Stock. In the event of changes in the
outstanding Common Stock by reason of recapitalizations, reorganizations,
mergers, consolidations, combinations, split-ups, split-offs, spin-offs,
exchanges or other relevant changes in capitalization or distributions to the
holders of Common Stock occurring after the date of the grant of any Award and
not otherwise provided for by this Paragraph XI, such Award and any agreement
evidencing such Award shall be subject to adjustment by the Committee at its
sole discretion as to the number and price of shares of Common Stock or other
consideration subject to such Award. In the event of any such change in the
outstanding Common Stock or distribution to the holders of Common Stock, the
aggregate number of shares available under the Plan and the maximum number of
shares that may be subject to Awards granted to any one individual may be
appropriately adjusted by the Committee, whose determination shall be
conclusive. Notwithstanding the foregoing, upon the occurrence of a Corporate
Change, the Committee, acting in its sole discretion without the consent or
approval of any Holder, may require the mandatory surrender to the Company by
selected Holders of some or all of the outstanding Performance Awards and
Phantom Stock Awards as of a date, before or after such Corporate Change,
specified by the Committee, in which event the Committee shall there upon cancel
such Performance Awards and Phantom Stock Awards and the Company shall pay (or
cause to be paid) to each Holder an amount of cash equal to the maximum value of
such Performance Award or Phantom Stock Award which, in the event the applicable
performance or vesting period set forth in such Performance Award or Phantom
Stock Award has not been completed, shall be multiplied by a fraction, the
numerator of which is the number of days during the period beginning on the
first day of the applicable performance or vesting period and ending on the date
of the surrender, and the denominator of which is the aggregate number of days
in the applicable performance or vesting period.
(f) Stockholder Action. Any adjustment provided for in the above
Subparagraphs shall be subject to any required stockholder action.
(g) No Adjustments unless Otherwise Provided. 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
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number of shares of Common Stock subject to Awards theretofore granted or the
purchase price per share, if applicable.
XII. AMENDMENT AND TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with respect
to any shares of Common Stock for which Awards have not theretofore been
granted. The Board shall have the right to alter or amend the Plan or any part
thereof from time to time; provided that no change in any Award theretofore
granted may be made which would impair the rights of the Holder without the
consent of the Holder, and provided, further, that the Board may not, without
approval of the stockholders, amend the Plan to (a) increase the maximum
aggregate number of shares that may be issued under the Plan or (b) change the
class of individuals eligible to receive Awards under the Plan.
XIII. MISCELLANEOUS
(a) No Right To An Award. Neither the adoption of the Plan nor any action
of the Board or of the Committee shall be deemed to give an employee any right
to be granted an Option, a right to a Restricted Stock Award, a right to a
Performance Award or a right to a Phantom Stock Award, or any other rights
hereunder except as may be evidenced by an Award agreement duly executed on
behalf of the Company, and then only to the extent and on the terms and
conditions expressly set forth therein. The Plan shall be unfunded. The Company
shall not be required to establish any special or separate fund or to make any
other segregation of funds or assets to assure the performance of its
obligations under any Award.
(b) No Employment Rights Conferred. Nothing contained in the Plan shall
(i)confer upon any employee any right with respect to continuation of employment
with the Company or any Affiliate or (ii) interfere in any way with the right of
the Company or any Affiliate to terminate his or her employment relationship at
any time.
(c) Other Laws; Withholding. The Company shall not be obligated to issue
any Common Stock pursuant to any Award granted under the Plan at any time when
the shares covered by such Award have not been registered under the Securities
Act of 1933, as amended, and such other state and federal laws, rules and
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 and regulations available for the issuance and
sale of such shares. No fractional shares of Common Stock shall be delivered,
nor shall any cash in lieu of fractional shares be paid. The Company shall have
the right to deduct in connection with all Awards any taxes required by law to
be withheld and to require any payments required to enable it to satisfy its
withholding obligations.
(d) No Restriction on Corporate Action. Nothing contained in the Plan shall
be construed to prevent the Company or any Affiliate from taking any action
which is deemed by the Company or such Affiliate to be appropriate or in its
best interest, whether or not such action would have an adverse effect on the
Plan or any Award made under the Plan. No employee, beneficiary or other person
shall have any claim against the Company or any Affiliate as a result of any
such action.
(e) Restrictions on Transfer. An Award (other than an Incentive Stock
Option, which shall be subject to the transfer restrictions set forth in
Paragraph VII(c)) shall not be transferable otherwise than
(i) by will or the laws of descent and distribution,
(ii) 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, or
(iii) with the consent of the Committee.
(f) Governing Law. The Plan shall be construed in accordance with the laws
of the State of Illinois.
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EXHIBIT 10.9
EXECUTION COPY
January 18, 2000
Mr. Charles L. Watson
46 Wincrest Falls
Cypress, Texas 77429
Dear Chuck:
Set forth below are the terms of your employment (the "Agreement") with
Dynegy Inc. (hereinafter referred to as "Dynegy" or the "Company").
1. TITLE AND DUTIES
Your title will be Chairman and Chief Executive Officer of the
Company. Your duties and responsibilities will be as described in the Company's
Bylaws (as amended, modified or supplemented from time to time) and as delegated
by the Board of Directors of the Company (the "Board of Directors") from time to
time during the Term of the Agreement (as defined below), to the extent such
duties and responsibilities are consistent with your duties and responsibilities
as of the day preceding the Effective Date (as defined below), or as otherwise
agreed by you. You will be employed at Dynegy's headquarters in Houston, Texas.
You shall devote your full working time, energy and skill to the performance of
your duties for Dynegy, 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 (3) years, commencing on the Effective Date and
ending on the third anniversary of the Effective Date (such period, as extended
pursuant to the next succeeding sentence, if applicable, the "Term"), The Term
shall automatically be extended for additional one (1) year periods unless
either the Company or you provides written notice at least sixty (60) days prior
to the date on which this Agreement would otherwise be automatically extended
that such party is electing not to so extend the Term. The term "Effective Date"
means the date of the closing of the proposed merger of Dynegy Inc. and Illinova
Corporation pursuant to that certain merger agreement dated as of June 14, 1999,
as amended.
<PAGE> 2
Mr. Charles L. Watson
January 18, 2000
Page 2
(b) If your employment with Dynegy 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 provisions of Paragraphs 5
and 6), 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" by
majority vote (excluding yourself) of the Board of Directors of as a result of
(i) your refusal to implement or adhere to lawful policies or lawful directives
of the Board of Directors; (ii) serious misconduct, dishonesty or disloyalty,
directly related to the performance of your duties for the Company or gross
negligence in the performance of your duties for the Company; (iii) your being
convicted (or entering into a plea bargain admitting or not contesting criminal
guilt) in any criminal felony proceeding; (iv) drug or alcohol abuse; (v)
continued failure to perform your duties under this Agreement, which is not
cured within ten (10) days after written notice of such failure is provided to
you by Dynegy; or (vi) any other material breach of this Agreement by you that
is not cured within ten (10) days after written notice of such breach is
delivered to you from 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 in lieu of
further payments to you pursuant to Paragraph 3 hereof: (i) a lump sum amount
equal to the product of (x) 2.99 and (y) the greater of (a) the average annual
Base Salary and incentive compensation, whether payable in cash or stock
options, you were required to be paid by the Company for the highest three (3)
calendar years preceding the calendar year in which your employment is
terminated (or such shorter period as you have actually been employed by the
Company), or (b) your Base Salary and target bonus amount through the date of
termination; (ii) a lump sum amount equal to the net present value, as
determined by the Board of Directors in its sole and absolute discretion, of the
benefits to be provided to you in Paragraphs 3(e), 3(f) and 3(g) of this
Agreement and such other perquisites (if any) being provided to you on the date
of your termination, as if you were still employed for the remainder of the Term
of this Agreement, with regard to those benefits to be provided to you during
the Term of this Agreement, and as if you had completed the Term of this
Agreement with regard to those benefits to be provided to you upon completion of
the Term of this Agreement; (iii) any employee stock options granted to you
prior to or during the Term of this Agreement shall become vested as of the date
of your resignation due to such constructive termination or discharge not for
cause, and you shall have the right to exercise any such vested options through
the end of the Term of this Agreement or one year from the date of termination,
whichever is later; and (iv) for a period of thirty-six (36) months from the
date of such termination, all health and welfare benefits the Company was
maintaining for you and your family as of the date of such resignation or
discharge.
<PAGE> 3
Mr. Charles L. Watson
January 18, 2000
Page 3
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), target range of annual
option grants under Paragraph 3(c) or other compensation as described in
Paragraphs 3(e), 3(f) and 3(g) is reduced; (ii) a significant diminution in your
responsibilities, authority or scope of duties is effected by the Board of
Directors, and such diminution is made without your written consent (without
regard to whether or not any change is made to your title); (iii) the Company
materially breaches this Agreement; (iv) the relocation of the Company's
principal executive offices to a location, or the Company requires you to be
based, outside a fifty (50) mile radius from the city limits of Houston, Texas;
or (v) in the event any "person" other than a mutual fund that acquires the
stock solely for investment purposes 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 13d-3
under the Exchange Act), directly or indirectly, of more than 50% of the total
voting stock of the Company regardless of whether any change is made to your job
duties, responsibilities or compensation. A "constructive termination" shall not
be deemed to have occurred in a change of control situation other than as set
forth in clauses (i) through (v) above. A "constructive termination" shall not
be deemed to have occurred in connection with a merger or consolidation to which
the Company is a party where the surviving entity which is the ultimate parent
company of the merged or consolidated entities is a public company, provided no
"person" or "group" as referenced in clause (v) above owns more than 50% of the
total voting stock of such surviving entity unless a "constructive termination"
under clauses (i), (ii), (iii) or (iv) has occurred. For the avoidance of doubt,
in order to claim the benefits payable hereunder in the event of a constructive
termination, you must resign. Any resignation by you as a result of assertion of
a constructive termination shall be communicated by delivery to the Board of
Directors within thirty (30) days from the commencement of such constructive
termination by written notice setting forth 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 (30) period, such resignation shall
take effect upon the expiration of thirty (30) days from the date of the
delivery of such notice. Any other resignation by you shall be communicated by
thirty (30) days' advance written notice.
(d) If you die, or become disabled and cannot perform your duties,
your employment hereunder shall be terminated immediately (except that the
confidentiality, noncompetition and nonsolicitation provisions of Paragraph 4
and the provisions of Paragraphs 5 and 6 shall survive the termination of your
employment) and: (i) you (or your estate) shall be entitled to the Base Salary
(as defined in Paragraph 3(a)) payable to you hereunder for twelve (12) months
following the month in which you die or become disabled, plus the amount of any
target bonus as described in Paragraph 3(b) for the year of death or disability,
prorated for the portion of the twelve-month (12) period elapsed in which the
death or disability occurs; (ii) you (or your estate) shall receive, for a
period of twenty-four (24) months from the date of your death or disability, all
health insurance and health benefits that the Company was maintaining for you
and/or your estate and for your family as of the date of your death or
disability; (iii) for a period of five (5) years from the date of your death or
disability, the Company shall continue to make contributions pursuant to any
Split Dollar Agreements between the Company and the Watson
<PAGE> 4
Mr. Charles L. Watson
January 18, 2000
Page 4
1996 Family Trust (an irrevocable trust created on March 22, 1996, by you and
Kim R. Watson, as the Grantors, and David C. Feldman, as the Trustee); (iv) any
employee stock options granted to you during the Term of this Agreement shall
become vested as of the date of your death or disability on the same terms as
provided for the vesting of stock options in Paragraph 2(c) above; (v) and for a
period of three (3) years following the date of your death or disability, the
Company shall continue to maintain Directors and Officers Liability Insurance on
the same terms it thereafter maintains such insurance for its directors and
officers. 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).
(e) Unless otherwise specified herein, all payments under this
Agreement shall be paid in a lump sum, less applicable withholding taxes, within
thirty (30) days following the date of your termination.
3. COMPENSATION
(a) Each year during the Term hereof, you will be paid a base salary
of $1,500,000 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. As part of Dynegy's incentive compensation program, you will have the
opportunity to earn a target bonus in an amount equal to 100% of your Base
Salary and a maximum cash award in an amount equal to 200% of your Base Salary,
dependent upon certain financial or performance objectives, determined in
accordance with such program and by the Board of Directors. To the extent any
incentive compensation in excess of the maximum cash amount referenced above is
payable under the Incentive Compensation Plan in any year to you, the Company
will pay you any such amounts in noncash equivalents (e.g., stock options or
restricted securities of the Company) of equal value, as determined by the Board
of Directors in its sole and absolute discretion. At your election, in lieu of
paying you all or part of such incentive compensation bonus, the Company will
allow you to direct that all or part of such incentive compensation shall be
allocated by the Company to, or expended directly for, charitable contributions
of your selection and/or payments of insurance premiums pursuant to any Split
Dollar Agreement between the Company and the Watson 1996 Family Trust (an
irrevocable trust created on March 22, 1996, by you and Kim R. Watson, as the
Grantors, and David C. Feldman, as the Trustee).
(c) Upon the Effective Date, you shall receive an initial grant of
stock options pursuant to the Company's Long Term Incentive Plan (the "LTIP")
with a projected value equal to 375% of your Base Salary. These options are
subject to the vesting, forfeiture and other terms and conditions of the LTIP.
Each year during the Term of this Agreement, you will be eligible to receive
stock option grants granted to an employee holding the positions of "Chairman"
and "Chief Executive Officer" in accordance with the requirements and provisions
of the LTIP. The current target range for annual option grants for your position
is a 75th percentile of 375% of
<PAGE> 5
Mr. Charles L. Watson
January 18, 2000
Page 5
your Base Salary. You recognize that any value of an award of "market" options
under the LTIP is a projected value, which is subject to the future 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
the 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
the stated value in excess of the exercise price.
(d) Upon the Effective Date, any options granted to you prior to
November 1, 1999 shall become vested,
(e) You will be entitled to participate in Dynegy's benefits programs
for senior management executives, including, without limitation, Dynegy's
deferred compensation plan for executives, as well as any Split Dollar Agreement
between the Company and the Watson 1996 Family Trust (an irrevocable trust
created on March 22, 1996, by you and Kim R. Watson, as the Grantors, and David
C. Feldman, as the Trustee). Without limiting the foregoing, you shall receive
the perquisites set forth on Schedule I attached hereto and by this reference
incorporated herein.
(f) During the Term of this Agreement, or until termination of this
Agreement if this Agreement terminates prior to expiration of the Term (except
as provided in Paragraph 2(a) hereof), the Company will pay all premiums on a
policy of insurance providing term protection only and no cash values, with a
death benefit payable upon your death in the amount of $1,000,000. You shall at
all times own the policy and have the right to designate the beneficiary of any
death proceeds. You will be responsible for policy selection, coverage and
effectiveness of the policy and any income taxes arising in connection
therewith; the Company's only obligation being to pay such premiums.
(g) In the event that you remain continuously employed through the
third anniversary of the Effective Date or your separation from employment prior
to completion of the Term of the Agreement is due to termination pursuant to
Paragraph 2(c), then the Company shall provide to you at its expense for a
period of five years thereafter an office separately located from the offices of
the Company that is comparable in size and facilities to that provided by the
Company during the Term of this Agreement. The Company shall also pay for
maintenance of such office space. You shall also be entitled to equip the office
with (and retain as your own following completion of the five year period) the
furniture, cabinets, pictures, equipment and office furnishings (but not any
intrinsically valuable art works or collectibles) used by you in your office at
the end of the Term or at the time of termination. You shall be responsible for
the tax consequences to you of the provisions of this Paragraph 3(g).
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
<PAGE> 6
Mr. Charles L. Watson
January 18, 2000
Page 6
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. 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 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 that period of time following the date of termination of your
employment for any reason other than pursuant to Paragraph 2(c) hereof (i.e., in
the event of a termination pursuant to the first paragraph of Paragraph 2(c),
the non-compete obligations of this Paragraph 4(c) shall terminate) through the
expiration of the Term or twenty-four (24) months from the date of termination,
whichever is earlier, 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,
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 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
<PAGE> 7
Mr. Charles L. Watson
January 18, 2000
Page 7
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 affiliate's own production as
described in clause (ii) of this Paragraph 4(c)); or (iv) an integrated
regulated electric and/or gas utility as long as such utility does not engage in
the unregulated marketing of its generation or power trading other than that
related to the generation or power marketing allocated to its own service areas.
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 five percent (5%) of the total outstanding shares of such company.
(d) For a period of twenty-four (24) months after the expiration or
termination of your employment for whatever reason, other than pursuant to
Paragraph 2(c) above or for a period of twelve months following the termination
of your employment pursuant to Paragraph 2(c) above, you shall not solicit,
raid, entice, encourage or induce any person who at the time of such expiration
or termination of employment is an employee of the Company, or any of its
subsidiaries or affiliated companies, to become employed by any person, firm or
corporation, and you shall not approach any such employee for such purpose or
authorize or knowingly approve the taking of such actions by any other person,
firm or corporation or assist any such person, firm or corporation in taking
such action.
(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.
Accordingly, you consent and agree that if you violate any of the
provisions of this Paragraph 4, the Company and its subsidiaries and affiliated
companies would sustain irreparable harm and, therefore, in addition to any
other remedies which the Company may have under this Agreement or otherwise, the
Company shall be entitled to an injunction from any court of competent
jurisdiction restraining you from committing or continuing any such violation of
this Paragraph 4. You acknowledge that damages at law would not be an adequate
remedy for violation of this Paragraph 4, and you therefore agree that the
provisions of this Paragraph 4 may be specifically enforced against you in any
court of competent jurisdiction. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies available to the
Company for such breach or threatened breach, including the recovery of damages
from you.
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
<PAGE> 8
Mr. Charles L. Watson
January 18, 2000
Page 8
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, to the fullest extent permitted
under applicable law, 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. The foregoing indemnification provisions shall be in addition to any other
rights to indemnification to which you may be entitled.
6. ARBITRATION
The parties hereto may attempt to resolve any dispute hereunder
informally via mediation or other means. Otherwise, any controversy or claim
arising out of or relating to this Agreement, or any breach thereof, shall,
except as provided in Paragraph 4, be adjudged 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 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 expenses reasonably incurred by you; provided further, 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. EXCISE TAXES
(a) In the event that any payment or benefit received or to be
received by you pursuant to the terms of this Agreement in connection with and
contingent on the termination of your employment with the Company (the "Contract
Payments") or of any other plan, arrangement or agreement of the Company (or any
affiliate) ("Other Payments" and, together
<PAGE> 9
Mr. Charles L. Watson
January 18, 2000
Page 9
with the Contract Payments, the "Payments") would be subject to the excise tax
(the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986
(as amended from time to time, the "Code") as determined as provided below, the
Company shall pay to you, at the time specified in Section 7(b) below, an
additional amount (the "Gross-Up Payment") such that the net amount retained by
you, after deduction of the Excise Tax on Payments and any federal, state and
local income tax and the Excise Tax upon the Gross-Up Payment, and any interest,
penalties or additions to tax payable by you with respect thereto, shall be
equal to the total present value (using the applicable federal rate (as defined
in Section 1274(d) of the Code in such calculation) of the Payments at the time
such Payments are to be made. The Company shall have the right to make any such
Gross-Up Payment, in whole or in part, in the form of a noncash payment of equal
value (as determined by Independent Counsel) to that portion of the Gross-Up
Payment had it been paid in cash. For purposes of determining whether any of the
Payments will be subject to the Excise Tax and the amounts of such Excise Tax,
(1) the total amount of the Payments shall be treated as "parachute payments"
within the meaning of section 280G(b)(2) of the Code, and all "excess parachute
payments" within the meaning of section 280G(b)(1) of the Code shall be treated
as subject to the Excise Tax, except to the extent that, in the opinion of
independent counsel selected by the Company and reasonably acceptable to you
("Independent Counsel"), a Payment (in whole or in part) does not constitute a
"parachute payment" within the meaning of section 280G(b)(2) of the Code, or
such "excess parachute payments" (in whole or in part) are not subject to the
Excise Tax, (2) the amount of the Payments that shall be treated as subject to
the Excise Tax shall be equal to the lesser of (A) the total amount of the
Payments or (B) the amount of "excess parachute payments" within the meaning of
section 280G(b)(1) of the Code (after applying clause (1) hereof), and (3) the
value of any noncash benefits or any deferred payment or benefit included in the
Payments or Gross-Up Payment, as applicable, shall be determined by Independent
Counsel in accordance with the principles of sections 280G(d)(3) and (4) of the
Code. For purposes of determining the amount of the Gross-Up Payment, you shall
be deemed to pay federal income taxes at the highest marginal rates of federal
income taxation applicable to the individuals in the calendar year in which the
Gross-Up Payment is to be made and state and local income taxes at the highest
marginal rates of taxation applicable to individuals as are in effect in the
state and locality of your residence in the calendar year in which the Gross-Up
Payment is to be made, net of the maximum reduction in federal income taxes that
can be obtained from deduction of such state and local taxes, taking into
account any limitations applicable to individuals subject to federal income tax
at the highest marginal rates.
(b) The Gross-Up Payments provided for in Paragraph 7(a) hereof shall
be made upon the earlier of (i) the payment to you of any Payment or (ii) the
imposition upon you or payment by you of any Excise Tax.
(c) If it is established pursuant to a final determination of a court
or an Internal Revenue Service proceeding or the opinion of Independent Counsel
that the Excise Tax is less than the amount taken into account under Section
7(a) hereof, you shall repay to the Company within thirty (30) days of your
receipt of notice of such final determination or opinion the portion of the
Gross-Up Payment attributable to such reduction (plus the portion of the
Gross-Up Payment attributable to the Excise Tax and federal, state and local
income tax imposed on the Gross-Up Payment being repaid by you if such repayment
results in a reduction in Excise
<PAGE> 10
Mr. Charles L. Watson
January 18, 2000
Page 10
Tax or a federal, state and local income tax deduction) plus any interest
received by you on the amount of such repayment. If it is established pursuant
to a final determination of a court or an Internal Revenue Service proceeding or
the opinion of Independent Counsel that the Excise Tax exceeds the amount taken
into account hereunder (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up Payment), the
Company shall make an additional Gross-Up Payment in respect of such excess
within thirty (30) days of the Company's receipt of notice of such final
determination or opinion.
(d) In the event of any change in, or further interpretation of,
sections 280G or 4999 of the Code and the regulations promulgated thereunder,
you shall be entitled, by written notice to the Company, to request an opinion
of Independent Counsel regarding the application of such change to any of the
foregoing, and the Company shall use its best efforts to cause such opinion to
be rendered as promptly as practicable. All fees and expenses of such
Independent Counsel incurred in connection with this Agreement shall be borne by
the Company.
8. PHYSICAL EXAMINATION
You agree, during each fiscal year of the Company, to undergo a
complete physical examination at Company expense, and you further agree that the
finding or diagnosis of a terminal illness or physical or mental condition that
will materially impair your ability to perform your duties and responsibilities
under this Agreement, which is the result of such examination, will be disclosed
to the Executive Committee of the Board of Directors. You agree to direct such
disclosure to the Executive Committee of the Board of Directors by an instrument
in writing, if necessary, but no disclosure shall be made to any other party
without your written consent.
9. 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) Except as otherwise provided in Paragraph 7 hereof, all payments
to you under this Agreement will be subject to the withholding of all applicable
employment taxes and income taxes; provided, however, that at your request the
parties hereto will use reasonable efforts to explore alternatives to allow the
Company to make charitable contributions on behalf
<PAGE> 11
Mr. Charles L. Watson
January 18, 2000
Page 11
of the employee by redirecting a portion of your annual bonuses to charitable
organization(s) chosen by you in accordance with Paragraph 3(b) of this
Agreement.
(e) 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 hereto or their legal
representatives and authorized by action of the Board of Directors. 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.
(f) 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:
Charles L. Watson Dynegy Inc.
46 Wincrest Falls 1000 Louisiana, Suite 5800
Cypress, Texas 77429 Houston, TX 77002
Attn: Chief Executive Officer
(g) 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.
(h) Neither you nor the Company will make or authorize any public
statement disparaging the other in its or his business interests and affairs.
Notwithstanding the foregoing, neither party shall be (i) required to make any
statement which it or he believes to be false or inaccurate, or (ii) restricted
in connection with any litigation, arbitration or similar proceeding or with
respect to its response to any legal process. The provisions in this Paragraph
9(h) shall survive the termination of your employment hereunder, irrespective of
the reason therefor.
(i) The waiver by the Company of breach of any provision of this
Agreement by you shall not operate or be construed as a waiver of any subsequent
breach by you. The
<PAGE> 12
Mr. Charles L. Watson
January 18, 2000
Page 12
waiver by you of a breach of any provision of this Agreement by the Company
shall not operate or be construed as a waiver of any subsequent breach by the
Company.
(j) 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.
(k) If any provision of this Agreement as applied to either party or
to any circumstances shall be adjudged by a court of competent jurisdiction to
be void or unenforceable, the same shall in no way affect any other provision of
this Agreement or the validity or enforceability of this Agreement.
(1) The section headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
(m) This Agreement may be executed in one or more counterparts, which
shall, collectively and separately, constitute one agreement.
(n) Notwithstanding anything to the contrary set forth in this
Agreement, the Company may cause any of its subsidiaries for which you render
services to pay or otherwise satisfy, in whole or in part, some or all of the
Company's obligations hereunder.
<PAGE> 13
Mr. Charles L. Watson
January 18, 2000
Page 13
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.
DYNEGY INC.
By:
---------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
AGREED AND ACCEPTED
this ____ day of January, 2000
- -------------------------------------
Charles L. Watson
<PAGE> 14
Watson Employment Agreement - Schedule I
EXECUTIVE PERQUISITES
Except as provided below, as long as you remain in the employment of the Company
during the Term of this Agreement, you will be entitled to the following:
1. At your option, the use of an automobile of a type equivalent to that
presently provided by the Company for use by you, your spouse and
members of your immediate family, or a cash automobile allowance of
$2,000 per month.
2. Personal membership in the Petroleum Club in Houston, Texas and two
(2) other downtown Houston luncheon clubs of your choice, including
the reimbursement of all dues and business-related expenses. These
memberships shall be assigned to you in the event of termination of
the Agreement for any reason, and you shall pay dues from the date of
termination but you shall not be obligated to reimburse the Company
for any amounts paid by the Company prior to termination.
3. Personal country club membership in two (2) country clubs of your
choice, including the reimbursement of all dues and business-related
expenses. These memberships shall be assigned to you in the event of
termination of the Agreement for any reason, and you shall pay dues
from the date of termination but you shall not be obligated to
reimburse the Company for any amounts paid by the Company prior to
termination. Notwithstanding anything to the contrary in this
Agreement or this Schedule, in no case shall the Company be obligated
to pay any amount of dues, fees or reimbursement for or to any country
club or luncheon club that, in the determination of the Board of
Directors, in its sole discretion, restricts membership or the
performance of services or the use of facilities on the basis of race,
religion, gender or national origin.
4. Vacations and holidays in accordance with the Company's policies in
effect from time to time for its senior executive officers, but not
less than six (6) weeks of vacation during each fiscal year.
5. A benefit package including medical, hospital, dental, disability and
life insurance plans and coverage for you and your spouse and children
at least as favorable to you (and your spouse and children) as that
provided to you immediately prior to the commencement of the Term of
this Agreement unless, with respect to any particular plan or
coverage, the continuation of such existing plan or coverage would
have material adverse financial or regulatory consequences to the
Company.
6. Reimbursement of fees for financial and/or federal income tax planning
(and reasonable accounting and legal fees associated therewith), the
allocable cost of which perquisites to you are not to exceed One
Hundred Thousand Dollars ($100,000) per annum.
<PAGE> 15
7. Use of any aircraft owned or leased by the Company for Company
business in accordance with the policies adopted by the Board of
Directors, which policy is subject to the approval of the Board of
Directors from time to time. You may also, in accordance with such
policies, which shall not be amended as they apply to you without your
prior consent, use any aircraft owned or leased by the Company for
your own personal business; provided, however, that (i) such use does
not adversely interfere with the use of such aircraft for Company
business, (ii) you shall maintain any records reasonably requested by
the Board of Directors, (iii) you shall compensate the company for
such use at the Company's actual after-tax costs for the use of such
aircraft and (iv) such personal use by you does not exceed fifty (50)
hours of flight time usage of such aircraft on a calendar year basis.
You shall be responsible for paying any income taxes attributable to
taxable income arising from such aircraft use.
<PAGE> 1
EXECUTION COPY
EXHIBIT 10.10
January 18, 2000
Mr. Stephen W. Bergstrom
1715 Chestnut Grove
Kingwood, Texas 77345
Dear Steve:
Set forth below are the terms of your employment (the "Agreement") with
Dynegy Inc. (hereinafter referred to as "Dynegy" or the "Company").
1. TITLE AND DUTIES
Your title shall be President and Chief Operating Officer of the
Company. You will be responsible for the duties typical to such position and
shall have such other duties as may be delegated from time to time by your
immediate supervisor. You will be employed at Dynegy's headquarters in Houston,
Texas. You shall devote your full time, energy and skill to the performance of
your duties for Dynegy, and will exercise due diligence and reasonable care in
the performance of such duties. During the Term (as defined below) of this
Agreement, you shall report to the Company's Chief Executive Officer or Chairman
of the Board and shall remain a member of the Company's Board of Directors.
2. TERM
(a) Unless earlier terminated as provided for herein, the term of
this Agreement will be for four (4) years, commencing on the Effective Date (as
defined below) and ending on the fourth anniversary of the Effective Date (such
period, as extended pursuant to the next succeeding sentence, if applicable, the
"Term"). The Term shall automatically be extended for additional one (1) year
periods unless either the Company or you provides written notice at least sixty
(60) days prior to the date on which this Agreement would otherwise be
automatically extended that such party is electing not to so extend the Term.
The term "Effective Date" means the date of the closing of the proposed merger
of Dynegy Inc. and Illinova Corporation pursuant to that certain merger
agreement dated as of June 14, 1999, as amended.
<PAGE> 2
Mr. Stephen W. Bergstrom
January 18, 2000
Page 2
(b) If your employment with Dynegy 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 provisions of Paragraphs 5
and 6), and the Company shall have no further obligation to you except for the
payment of amounts due through the date of such termination and except that you
will be fully vested with regard to all stock options (irrespective of the date
of the grant of such options and irrespective of the vesting schedule otherwise
applicable to such options) granted to you hereunder as a signing bonus, as
provided in Paragraph 3(d) below, and you shall be permitted to retain such
options for future exercise or sell such stock received on exercise as though
you had remained in the employment of the Company until the end of the Term. The
Company shall take such actions as permitted by applicable law to cause such
vesting and option retention. However, nothing in this Paragraph 2(b) shall
require accelerated vesting or accelerated exercisability of any other stock
options that may have been or may be granted to you unless otherwise expressly
provided for herein. 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 and
except for you being fully vested with regard to all stock options (irrespective
of the date of the grant of such options and irrespective of the vesting
schedule otherwise applicable to such options) granted to you hereunder as a
signing bonus, as provided in Paragraph 3(d) below, and you shall be permitted
to retain such options for future exercise or sell such stock received on
exercise as though you had remained in the employment of the Company until the
end of the Term, and the Company shall take such actions as permitted by
applicable law to cause such vesting and option retention. For purposes of this
Agreement, you may be terminated for "cause" as a result of (i) your refusal to
implement or adhere to lawful policies or lawful directives of the Board of
Directors of Dynegy (the "Board of Directors") or your immediate supervisor that
is not cured within ten (10) days after written notice of such refusal is
delivered to you from the Company; (ii) serious misconduct, dishonesty or
disloyalty, directly related to the performance of your duties for the Company
or gross negligence in the performance of your duties for the Company that is
not cured within ten (10) days after written notice of such misconduct,
dishonesty or disloyalty or gross negligence is delivered to you from the
Company; (iii) your being convicted (or entering into a plea bargain admitting
or not contesting criminal guilt) in any criminal felony proceeding; (iv) drug
or alcohol abuse; (v) continued failure to perform your duties under this
Agreement, which is not cured within ten (10) days after written notice of such
failure is provided to you by Dynegy; or (vi) any other material breach of this
Agreement by you that is not cured within ten (10) days after written notice of
such breach is delivered to you from 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
in lieu of further payments to you pursuant to Paragraph 3 hereof: (i) a lump
sum amount equal to the product of (x) 2.99 and (y) the greater of (a) the
average annual Base Salary and incentive compensation, whether payable in cash
or stock options, you were paid by the Company for the highest three (3)
calendar years preceding the calendar year in
<PAGE> 3
Mr. Stephen W. Bergstrom
January 18 2000
Page 3
which your employment is terminated (or such shorter period as you have actually
been employed by the Company), or (b) your Base Salary and target bonus amount
for the year in which your employment is terminated; (ii) a lump sum amount
equal to the net present value, as determined by the Board of Directors in its
sole and absolute discretion, of the benefits to be provided to you in
Paragraphs 3(f) and 3(g) of this Agreement and such other perquisites (if any)
being provided to you on the date of your termination, as if you were still
employed for the remainder of the Term of this Agreement, with regard to those
benefits to be provided to you during the Term of this Agreement, and as if you
had completed the Term of this Agreement with regard to those benefits to be
provided to you upon completion of the Term of this Agreement; (iii) any
employee stock options granted to you prior to or during the Term of this
Agreement shall become vested as of the date of your resignation due to such
constructive termination or discharge not for cause, and you shall have the
right to exercise any such vested options through the end of the Term of this
Agreement or one year from the date of termination, whichever is later; and (iv)
for a period of thirty-six (36) months from the date of such termination, all
health and welfare benefits the Company was maintaining for you and your family
as of the date of such resignation or discharge.
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), target range
of annual option grants under Paragraph 3(c) or other compensation as described
in Paragraphs 3(f) and 3(g) is reduced; (ii) you are removed from the Board of
Directors or no longer report to the Chief Executive Officer or Chairman of the
Board or a significant diminution in your responsibilities, authority or scope
of duties is effected by the Board of Directors, and such diminution is made
without your written consent (without regard to whether or not any change is
made to your title); (iii) the Company materially breaches this Agreement; (iv)
the relocation of the Company's principal executive offices to a location, or
the Company requires you to be based, outside a fifty (50) mile radius from the
city limits of Houston, Texas; or (v) in the event any "person" other than a
mutual fund that acquires the stock solely for investment purposes 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 13d-3 under the Exchange Act), directly or
indirectly, of more than 50% of the total voting stock of the Company regardless
of whether any change is made to your job duties, responsibilities or
compensation. A "constructive termination" shall not be deemed to have occurred
in a change of control situation other than as set forth in clauses (i) through
(v) above. A "constructive termination" shall not be deemed to have occurred in
connection with a merger or consolidation to which the Company is a party where
the surviving entity which is the ultimate parent company of the merged or
consolidated entities is a public company, provided no "person" or "group" as
referenced in clause (v) above owns more than 50% of the total voting stock of
such surviving entity unless a "constructive termination" under clauses (i),
(ii), (iii) or (iv) has occurred. For the avoidance of doubt, in order to claim
the benefits payable hereunder in the event of a constructive termination, you
must resign. Any resignation by you as a result of assertion of a constructive
termination shall be communicated by delivery to the Board of Directors within
thirty (30) days from the commencement of such constructive termination by
written notice setting forth the grounds therefor, during which period the
Company shall be entitled to cure or remedy the matters set
<PAGE> 4
Mr. Stephen W. Bergstrom
January 18 2000
Page 4
forth in such notice to your reasonable satisfaction. Unless you withdraw such
notice prior to the expiration of such thirty-day (30) period, such resignation
shall take effect upon the expiration of thirty (30) days from the date of the
delivery of such notice. Any other resignation by you shall be communicated by
thirty (30) days' advance written notice.
(d) If you die, or become disabled and cannot perform your duties,
your employment hereunder shall be terminated immediately (except that the
confidentiality, noncompetition and nonsolicitation provisions of Paragraph 4
and the provisions of Paragraphs 5 and 6 shall survive the termination of your
employment) and: (i) you (or your estate) shall be entitled to the Base Salary
(as defined in Paragraph 3(a)) payable to you hereunder for twelve (12) months
following the month in which you die or become disabled, plus the amount of any
target bonus as described in Paragraph 3(b) for the year of death or disability,
prorated for the portion of the twelve-month (12) period elapsed in which the
date of death or disability occurs; (ii) you (or your estate) shall receive, for
a period of twenty-four (24) months from the date of your death or disability,
all health insurance and health benefits that the Company was maintaining for
you and/or your estate and for your family as of the date of your death or
disability; (iii) for a period of five (5) years from the date of your death or
disability, the Company shall continue to make contributions pursuant to any
Split Dollar Agreements between the Company and you (or any irrevocable trust
created by you); and (iv) any employee stock options granted to you during the
Term of this Agreement shall become vested as of the date of your death or
disability on the same terms as provided for the vesting of stock options in
Paragraph 2(c) above. 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).
(e) Unless otherwise specified herein, all payments under this
Agreement shall be paid in a lump sum, less applicable withholding taxes, within
thirty (30) days following the date of your termination.
3. COMPENSATION
(a) Each year during the Term hereof, you will be paid a base
salary of $850,000 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. As part of Dynegy's incentive compensation program, you will
have the opportunity to earn a target bonus in an amount equal to 100% of your
Base Salary and a maximum cash award in an amount equal to 200% of your Base
Salary, dependent upon certain financial or performance objectives, determined
in accordance with such program and by the Board of Directors. To the extent any
incentive compensation in excess of the maximum cash amount referenced above is
payable under the Incentive Compensation Plan in any year to you, the Company
will pay you any such amounts in noncash equivalents (e.g., stock options or
restricted securities of the Company) of equal value, as determined by the Board
of Directors in its sole and absolute
<PAGE> 5
Mr. Stephen W. Bergstrom
January 18 2000
Page 5
discretion. At your election, in lieu of paying you all or part of such
incentive compensation bonus, the Company will allow you to direct that all or
part of such incentive compensation be allocated by the Company to, or expended
directly for, charitable contributions of your selection and/or payments of
insurance premiums pursuant to Split Dollar Agreements between the Company and
you (or any irrevocable trust created by you).
(c) Upon the Effective Date, you shall receive an initial grant of
stock options pursuant to the Company's Long Term Incentive Plan (the "LTIP")
with a projected value equal to 300% of your Base Salary. Each year during the
Term of this Agreement, you will be eligible to receive stock option grants
granted to an employee holding the positions of "President" and "Chief Operating
Officer" in accordance with the requirements and provisions of the LTIP. The
current target range for annual option grants for your position is a median of
200% and a 75th percentile of 300% of your Base Salary. You recognize that any
value of an award of "market" options under the LTIP is a projected value, which
is subject to the future 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 the 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 the stated value in excess of
the exercise price. These options are subject to the vesting, forfeiture and
other terms and conditions of the LTIP.
(d) Upon the Effective Date, you will receive, as a signing bonus,
a grant of discounted stock options under Dynegy's Market and Employee Equity
Option Plan ("EEOP") with an immediate in-the-money value equal to $2,000,000,
with one-third (1/3) of these options vesting on each of the first, second and
third anniversary of the Effective Date. These options shall be subject to the
forfeiture and other terms and conditions of the EEOP. You and the Company
acknowledge and agree that: (i) as of the Effective Date, that certain
Employment Agreement (as the same may have been amended, modified or
supplemented from time to time, the "Employment Agreement"), dated as of May 8,
1997, between you and NGC Corporation, is hereby terminated and of no further
force and effect and (ii) the payment granted to you pursuant to this Paragraph
3(d) is in full satisfaction of all of the Company's remaining duties and
obligations under the Employment Agreement.
(e) Upon the Effective Date, any options granted to you prior to
November 1, 1999 shall become vested.
(f) You will be entitled to participate in Dynegy's benefits
programs for senior management executives, including, without limitation,
Dynegy's deferred compensation plan for executives, as well as any Split Dollar
Agreement between the Company and you (or any irrevocable trust created by you).
Without limiting the foregoing, you shall receive the perquisites set forth on
Schedule I attached hereto and by this reference incorporated herein.
(g) During the Term of this Agreement, or until termination of
this Agreement if this Agreement terminates prior to expiration of the Term
(except as provided in Paragraph 2(a) hereof), the Company will pay all premiums
on a policy of insurance providing term protection only and no cash values, with
a death benefit payable upon your death in the amount of $1,000,000. You shall
at all times own the policy and have the right to designate the
<PAGE> 6
Mr. Stephen W. Bergstrom
January 18 2000
Page 6
beneficiary of any death proceeds. You will be responsible for policy selection,
coverage and effectiveness of the policy and any income taxes arising in
connection therewith; the Company's only obligation being to pay such premiums.
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. 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
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 that period of time following the termination of your employment
for any reason other than pursuant to Paragraph 2(c) hereof (i.e., in the event
of a termination pursuant to the first paragraph of Paragraph 2(c), the
non-compete obligations of this Paragraph 4(c) shall terminate) through the
expiration of the Term or twenty-four (24) months from the date of termination,
whichever is earlier, 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,
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
<PAGE> 7
Mr. Stephen W. Bergstrom
January 18 2000
Page 7
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 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 affiliate's own production as described in clause (ii) of this
Paragraph 4(c)); or (iv) an integrated regulated electric and/or gas utility as
long as such utility does not engage in the unregulated marketing of its
generation or power trading other than that related to the generation or power
marketing allocated to its own service areas. 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.
(d) For a period of twenty-four (24) months after the expiration
or termination of your employment for whatever reason, other than pursuant to
Paragraph 2(c) above or for a period of twelve months following the termination
of your employment pursuant to Paragraph 2(c) above, you shall not solicit,
raid, entice, encourage or induce any person who at the time of expiration or
termination of employment is an employee of the Company, or any of its
subsidiaries or affiliated companies, to become employed by any person, firm or
corporation, and you shall not approach any such employee for such purpose or
authorize or knowingly approve the taking of such actions by any other person,
firm or corporation or assist any such person, firm or corporation in taking
such action.
(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.
Accordingly, you consent and agree that if you violate any of the
provisions of this Paragraph 4, the Company and its subsidiaries and affiliated
companies would sustain irreparable harm and, therefore, in addition to any
other remedies which the Company may have under this Agreement or otherwise, the
Company shall be entitled to an injunction from any court of competent
jurisdiction restraining you from committing or continuing any such violation of
this Paragraph 4. You acknowledge that damages at law would not be an adequate
remedy for
<PAGE> 8
Mr. Stephen W. Bergstrom
January 18 2000
Page 8
violation of this Paragraph 4, and you therefore agree that the provisions of
this Paragraph 4 may be specifically enforced against you in any court of
competent jurisdiction. Nothing herein shall be construed as prohibiting the
Company from pursuing any other remedies available to the Company for such
breach or threatened breach, including the recovery of damages from you.
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, to the fullest extent permitted under applicable
law, 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.
The foregoing indemnification provisions shall be in addition to any other
rights to indemnification to which you may be entitled.
6. ARBITRATION
The parties hereto may attempt to resolve any dispute hereunder
informally via mediation or other means. Otherwise, any controversy or claim
arising out of or relating to this Agreement, or any breach thereof, shall,
except as provided in Paragraph 4, be adjudged 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 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 expenses reasonably incurred by you; provided further, 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
<PAGE> 9
Mr. Stephen W. Bergstrom
January 18 2000
Page 9
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. EXCISE TAXES
(a) In the event that any payment or benefit received or to be
received by you pursuant to the terms of this Agreement in connection with and
contingent on the termination of your employment with the Company (the "Contract
Payments") or of any other plan, arrangement or agreement of the Company (or any
affiliate) ("Other Payments" and, together with the Contract Payments, the
"Payments") would be subject to the excise tax (the "Excise Tax") imposed by
Section 4999 of the Internal Revenue Code of 1986 (as amended from time to time,
the "Code") as determined as provided below, the Company shall pay to you, at
the time specified in Section 7(b) below, an additional amount (the "Gross-Up
Payment") such that the net amount retained by you, after deduction of the
Excise Tax on Payments and any federal, state and local income tax and the
Excise Tax upon the Gross-Up Payment, and any interest, penalties or additions
to tax payable by you with respect thereto, shall be equal to the total present
value (using the applicable federal rate (as defined in Section 1274(d) of the
Code in such calculation) of the Payments at the time such Payments are to be
made. The Company shall have the right to make any such Gross-Up Payment, in
whole or in part, in the form of a noncash payment of equal value (as determined
by Independent Counsel) to that portion of the Gross-Up Payment had it been paid
in cash. For purposes of determining whether any of the Payments will be subject
to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of
the Payments shall be treated as "parachute payments" within the meaning of
section 280G(b)(2) of the Code, and all "excess parachute payments" within the
meaning of section 280G(b)(l) of the Code shall be treated as subject to the
Excise Tax, except to the extent that, in the opinion of independent counsel
selected by the Company and reasonably acceptable to you ("Independent
Counsel"), a Payment (in whole or in part) does not constitute a "parachute
payment" within the meaning of section 280G(b)(2) of the Code, or such "excess
parachute payments" (in whole or in part) are not subject to the Excise Tax, (2)
the amount of the Payments that shall be treated as subject to the Excise Tax
shall be equal to the lesser of (A) the total amount of the Payments or (B) the
amount of "excess parachute payments" within the meaning of section 280G(b)(1)
of the Code (after applying clause (1) hereof), and (3) the value of any noncash
benefits or any deferred payment or benefit included in the Payments or Gross-Up
Payment, as applicable, shall be determined by Independent Counsel in accordance
with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, you shall be deemed to pay
federal income taxes at the highest marginal rates of federal income taxation
applicable to the individuals in the calendar year in which the Gross-Up Payment
is to be made and state and local income taxes at the highest marginal rates of
taxation applicable to individuals as are in effect in the state and locality of
your residence in the calendar year in which the Gross-Up Payment is to be made,
net of the maximum reduction in federal income taxes that can be obtained from
deduction of such state and local taxes, taking into account any limitations
applicable to individuals subject to federal income tax at the highest marginal
rates.
<PAGE> 10
Mr. Stephen W. Bergstrom
January 18 2000
Page 10
(b) The Gross-Up Payments provided for in Paragraph 7(a) hereof
shall be made upon the earlier of (i) the payment to you of any Payment or (ii)
the imposition upon you or payment by you of any Excise Tax.
(c) If it is established pursuant to a final determination of a
court or an Internal Revenue Service proceeding or the opinion of Independent
Counsel that the Excise Tax is less than the amount taken into account under
Section 7(a) hereof, you shall repay to the Company within thirty (30) days of
your receipt of notice of such final determination or opinion the portion of the
Gross-Up Payment attributable to such reduction (plus the portion of the
Gross-Up Payment attributable to the Excise Tax and federal, state and local
income tax imposed on the Gross-Up Payment being repaid by you if such repayment
results in a reduction in Excise Tax or a federal, state and local income tax
deduction) plus any interest received by you on the amount of such repayment. If
it is established pursuant to a final determination of a court or an Internal
Revenue Service proceeding or the opinion of Independent Counsel that the Excise
Tax exceeds the amount taken into account hereunder (including by reason of any
payment the existence or amount of which cannot be determined at the time of the
Gross-Up Payment), the Company shall make an additional Gross-Up Payment in
respect of such excess within thirty (30) days of the Company's receipt of
notice of such final determination or opinion.
(d) In the event of any change in, or further interpretation of,
sections 280G or 4999 of the Code and the regulations promulgated thereunder,
you shall be entitled, by written notice to the Company, to request an opinion
of Independent Counsel regarding the application of such change to any of the
foregoing, and the Company shall use its best efforts to cause such opinion to
be rendered as promptly as practicable. All fees and expenses of such
Independent Counsel incurred in connection with this Agreement shall be borne by
the Company.
8. 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) Except as otherwise provided in Paragraph 7 hereof, all
payments to you under this Agreement will be subject to the withholding of all
applicable employment taxes and income taxes; provided, however, that at your
request the parties hereto will use reasonable efforts to explore alternatives
to allow the Company to make charitable contributions on behalf
<PAGE> 11
Mr. Stephen W. Bergstrom
January 18 2000
Page 11
of the employee by redirecting a portion of your annual bonuses to charitable
organization(s) chosen by you in accordance with Paragraph 3(b) of this
Agreement.
(e) 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 of Directors. 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.
(f) 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:
Stephen W. Bergstrom Dynegy Inc.
21715 Chestnut Grove 1000 Louisiana, Suite 5800
Kingwood, TX 77345 Houston, TX 77002
Attn: Chief Executive Officer
(g) 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.
(h) Neither you nor the Company will make or authorize any public
statement disparaging the other in its or his business interests and affairs.
Notwithstanding the foregoing, neither party shall be (i) required to make any
statement which it or he believes to be false or inaccurate, or (ii) restricted
in connection with any litigation, arbitration or similar proceeding or with
respect to its response to any legal process. The provisions in this Paragraph
8(h) shall survive the termination of your employment hereunder, irrespective of
the reason therefor.
(i) The waiver by the Company of breach of any provision of this
Agreement by you shall not operate or be construed as a waiver of any subsequent
breach by you. The
<PAGE> 12
Mr. Stephen W. Bergstrom
January 18 2000
Page 12
waiver by you of a breach of any provision of this Agreement by the Company
shall not operate or be construed as a waiver of any subsequent breach by the
Company.
(j) 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.
(k) If any provision of this Agreement as applied to either party
or to any circumstances shall be adjudged by a court of competent jurisdiction
to be void or unenforceable, the same shall in no way affect any other provision
of this Agreement or the validity or enforceability of this Agreement.
(l) The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(m) This Agreement may be executed in one or more counterparts,
which shall, collectively and separately, constitute one agreement.
(n) Notwithstanding anything to the contrary set forth in this
Agreement, the Company may cause any of its subsidiaries for which you render
services to pay or otherwise satisfy, in whole or in part, some or all of the
Company's obligations hereunder.
<PAGE> 13
Mr. Stephen W. Bergstrom
January 18 2000
Page 13
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.
DYNEGY INC.
By:
--------------------------------
Name: Charles L. Watson
Title: Chairman & CEO
AGREED AND ACCEPTED
this _____ day of January, 2000
- -------------------------------
Stephen W. Bergstrom
<PAGE> 14
EXECUTION COPY
Bergstrom Employment Agreement - Schedule I
EXECUTIVE PERQUISITES
Except as provided below, as long as you remain in the employment of the Company
during the Term of this Agreement, you will be entitled to the following:
1. Personal country club membership in Kingwood Country Club, including
the reimbursement of all dues and business-related expenses. This
membership shall be assigned to you in the event of termination of the
Agreement for any reason, and you shall pay dues from the date of
termination, but you shall not be obligated to reimburse the Company
for any amounts paid by the Company prior to termination.
Notwithstanding anything to the contrary in this Agreement or this
Schedule, in no case shall the Company be obligated to pay any amount
of dues, fees or reimbursement for or to any country club or luncheon
club that, in the determination of the Board of Directors in its sole
discretion, restricts membership or the performance of services or the
use of facilities on the basis of race, religion, gender or national
origin.
2. Personal membership in two (2) Houston luncheon clubs of your choice,
including the reimbursement of all dues and business-related expenses.
These memberships shall be assigned to you in the event of termination
of the Agreement for any reason, and you shall pay dues from the date
of termination, but you will not be obligated to reimburse the Company
for any amounts paid by the Company prior to termination.
3. Vacations and holidays in accordance with the Company's policies in
effect from time to time for its senior executive officers, but not
less than six (6) weeks of vacation during each fiscal year.
4. A benefit package including medical, hospital, dental, disability and
life insurance plans and coverage for you and your spouse and children
at least as favorable to you (and your spouse and children) as that
provided to you immediately prior to the commencement of the Term of
this Agreement unless, with respect to any particular plan or coverage,
the continuation of such existing plan or coverage would have material
adverse financial or regulatory consequences to the Company.
5. Reimbursement of fees for annual medical physical examinations and for
financial and/or federal income tax planning (and reasonable accounting
and legal fees associated therewith), the allocable cost of which
perquisites to you are not to exceed $25,000 annually.
6. Use of any aircraft owned or leased by the Company for Company business
in accordance with the policies adopted by the Board of Directors,
which policy is subject to the approval of the Board of Directors from
time to time, You may also, in accordance with such policies, which
shall not be amended as they apply to you without your prior consent,
use any aircraft owned or leased by the Company for your own personal
business; provided, however, that (i) such use does not adversely
interfere with the use of such aircraft for Company business, (ii) you
shall maintain any records reasonably requested by the Board of
Directors, (iii) you shall compensate the Company for such use -
<PAGE> 1
EXHIBIT 10.11
January 11, 2000
Mr. John U. Clarke
6540 Rutgers
Houston, Texas 77005
Dear John:
Set forth below are the terms of your employment (the "Agreement") with
Dynegy Inc. (hereinafter referred to as "Dynegy" or the "Company").
1. TITLE AND DUTIES
Your title shall be Executive Vice President. You will be
responsible for the duties typical to such position and shall have such other
duties as may be delegated from time to time by your immediate supervisor. You
will be employed at Dynegy's headquarters in Houston, Texas. You shall devote
your full time, energy and skill to the performance of your duties for Dynegy,
and will exercise due diligence and reasonable care in the performance of such
duties. During the Term (as defined below) of this Agreement, you shall report
to the Company's Chief Executive Officer and be a member of the Company's
Corporate Strategy and Policy Committee. The Company will take such action as
may be required to facilitate your election as a non-voting Advisory Director of
Dynegy. In addition, you will be permitted to participate in such other
business, professional or charitable affiliations with the prior written
approval of the Company's Chief Executive Officer.
2. TERM
(a) Unless earlier terminated as provided for herein, the term of
this Agreement will be for four (4) years, commencing on the Effective Date (as
defined below) and ending on the fourth anniversary of the Effective Date (such
period, as extended pursuant to the next succeeding sentence, if applicable, the
"Term"). The Term shall automatically be extended for additional one (1) year
periods unless either the Company or you provides written notice at least sixty
(60) days prior to the date on which this Agreement would otherwise be
automatically extended that such party is electing not to so extend the Term.
The term "Effective Date" means
<PAGE> 2
Mr. John U. Clarke
January 11, 2000
Page 2
the date of the closing of the proposed merger of Dynegy Inc. and Illinova
Corporation pursuant to that certain merger agreement dated as of June 14, 1999,
as amended.
(b) If your employment with Dynegy 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 provisions of Paragraphs 5
and 6), and the Company shall have no further obligation to you except for the
payment of amounts due before the date of such termination and except that you
will be fully vested with regard to all stock options (irrespective of the date
of the grant of such options and irrespective of the vesting schedule otherwise
applicable to such options) granted to you hereunder as a signing bonus, as
provided in Paragraph 3(d) below, and you shall be permitted to retain such
options for future exercise or sell such stock received on exercise as though
you had remained in the employment of the Company until the end of the Term. The
Company shall take such actions as permitted by applicable law to cause such
vesting and option retention. However, nothing in this Paragraph 2(b) shall
require accelerated vesting or accelerated exercisability of any other stock
options that may have been or may be granted to you unless otherwise expressly
provided for herein. 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 and
except for you being fully vested with regard to all stock options (irrespective
of the date of the grant of such options and irrespective of the vesting
schedule otherwise applicable to such options) granted to you hereunder as a
signing bonus, as provided in Paragraph 3(d) below, and you shall be permitted
to retain such options for future exercise or sell such stock received on
exercise as though you had remained in the employment of the Company until the
end of the Term, and the Company shall take such actions as permitted by
applicable law to cause such vesting and option retention. For purposes of this
Agreement, you may be terminated for "cause" as a result of (i) your refusal to
implement or adhere to lawful policies or lawful directives of the Board of
Directors of Dynegy (the "Board of Directors") or your immediate supervisor;
(ii) serious misconduct, dishonesty or disloyalty, directly related to the
performance of your duties for the Company or gross negligence in the
performance of your duties for the Company; (iii) your being convicted (or
entering into a plea bargain admitting or not contesting criminal guilt) in any
criminal felony proceeding; (iv) drug or alcohol abuse; (v) continued failure to
perform your duties under this Agreement, which is not cured within ten (10)
days after written notice of such failure is provided to you by Dynegy; or (vi)
any other material breach of this Agreement by you that is not cured within ten
(10) days after written notice of such breach is delivered to you from 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
in lieu of further payments to you pursuant to Paragraph 3 hereof: (i) a lump
sum amount equal to the product of (x) 2.99 and (y) the greater of (a) the
average annual Base Salary and incentive compensation, whether payable in cash
or stock options, you were paid by the Company for the highest three (3)
calendar years preceding the calendar year in which your
<PAGE> 3
Mr. John U. Clarke
January 11, 2000
Page 3
employment is terminated (or such shorter period as you have actually been
employed by the Company), or (b) your Base Salary and target bonus amount for
the year in which your employment is terminated; (ii) a lump sum amount equal to
the net present value, as determined by the Board of Directors in its sole and
absolute discretion, of the benefits to be provided to you in Paragraphs 3(f)
and 3(g) of this Agreement and such other perquisites (if any) being provided to
you on the date of your termination, as if you were still employed for the
remainder of the Term of this Agreement, with regard to those benefits to be
provided to you during the Term of this Agreement, and as if you had completed
the Term of this Agreement with regard to those benefits to be provided to you
upon completion of the Term of this Agreement; (iii) any employee stock options
granted to you prior to or during the Term of this Agreement shall become vested
as of the date of your resignation due to such constructive termination or
discharge not for cause, and you shall have the right to exercise any such
vested options through the end of the Term of this Agreement or one year from
the date of termination, whichever is later; and (iv) for a period of thirty-six
(36) months from the date of such termination, all health and welfare benefits
the Company was maintaining for you and your family as of the date of such
resignation or discharge.
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), target range of annual
option grants under Paragraph 3(c) or other compensation as described in
Paragraphs 3(f) and 3(g) is reduced; (ii) a significant diminution in your
responsibilities, authority or scope of duties is effected by the Board of
Directors, and such diminution is made without your written consent (without
regard to whether or not any change is made to your title); (iii) the Company
materially breaches this Agreement; or (iv) the relocation of the Company's
principal executive offices to a location, or the Company requires you to be
based, outside a fifty (50) mile radius from the city limits of Houston, Texas.
Any resignation by you as a result of assertion of a constructive termination
shall be communicated by delivery to the Board of Directors within thirty (30)
days from the commencement of such constructive termination by written notice
setting forth 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 (30) period, such resignation shall take effect upon the
expiration of thirty (30) days from the date of the delivery of such notice. Any
other resignation by you shall be communicated by thirty (30) days' advance
written notice.
(d) If you die, or become disabled and cannot perform your duties,
your employment hereunder shall be terminated immediately (except that the
confidentiality, noncompetition and nonsolicitation provisions of Paragraph 4
and the provisions of Paragraphs 5 and 6 shall survive the termination of your
employment) and: (i) you (or your estate) shall be entitled to the Base Salary
(as defined in Paragraph 3(a)) payable to you hereunder for twelve (12) months
following the month in which you die or become disabled, plus the amount of any
target bonus as described in Paragraph 3(b) for the year of death or disability,
prorated for the portion of the twelve-month period (12) elapsed in which the
death or disability occurs; (ii) you (or your estate) shall receive, for a
period of twenty-four (24) months from the date of your death or disability, all
health insurance and health benefits that the Company was maintaining for you
<PAGE> 4
Mr. John U. Clarke
January 11, 2000
Page 4
and/or your estate and for your family as of the date of your death or
disability; and (iii) any employee stock options granted to you during the Term
of this Agreement shall become vested as of the date of your death or disability
on the same terms as provided for the vesting of stock options in Paragraph 2(c)
above. 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).
(e) Unless otherwise specified herein, all payments under this
Agreement shall be paid in a lump sum, less applicable withholding taxes, within
thirty (30) days following the date of your termination.
3. COMPENSATION
(a) Each year during the Term hereof, you will be paid a base
salary of $450,000 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. As part of Dynegy's incentive compensation program, you will
have the opportunity to earn a target bonus in an amount equal to 100% of your
Base Salary and a maximum cash award in an amount equal to 200% of your Base
Salary, dependent upon certain financial or performance objectives, determined
in accordance with such program and by the Board of Directors. To the extent any
incentive compensation in excess of the maximum cash amount referenced above is
payable under the Incentive Compensation Plan in any year to you, the Company
will pay you any such amounts in noncash equivalents (e.g., stock options or
restricted securities of the Company) of equal value, as determined by the Board
of Directors in its sole and absolute discretion, At your election, in lieu of
paying you all or part of such incentive compensation bonus, the Company will
allow you to direct that all or part of such incentive compensation shall be
allocated by the Company to, or expended directly for, charitable contributions
of your selection.
(c) Upon the Effective Date, you shall receive an initial grant of
stock options pursuant to the Company's Long Term Incentive Plan (the "LTIP")
with a projected value equal to 270% of your Base Salary. These options are
subject to the vesting, forfeiture and other terms and conditions of the LTIP.
Each year during the Term of this Agreement, you will be eligible to receive
stock option grants granted to an employee holding the position of "Executive
Vice President" in accordance with the requirements and provisions of the LTIP.
The current target range for annual option grants for your position is a median
of 180% and a 75th percentile of 270% of your Base Salary. You recognize that
any value of an award of "market" options under the LTIP is a projected value,
which is subject to the future 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 the five years from the date of
grant, assuming an
<PAGE> 5
Mr. John U. Clarke
January 11, 2000
Page 5
increase in market price of 15% per annum during the five years, the stock
option may be exercised to obtain the stated value in excess of the exercise
price.
(d) Upon the Effective Date, you will receive, as a signing bonus,
(x) a cash payment in the amount of $500,000 and (y) a grant of discounted stock
options under Dynegy's Market and Employee Equity Option Plan ("EEOP") with an
immediate in-the-money value equal to $750,000, with one-third (1/3) of these
options vesting on each of the first, second and third anniversary of the
Effective Date. These options shall be subject to the forfeiture and other terms
and conditions of the EEOP, except as provided in clause (b) of Paragraph 2
hereunder. You and the Company acknowledge and agree that: (i) as of the
Effective Date, that certain Employment Agreement (as the same may have been
amended, supplemented or modified from time to time, the "Employment
Agreement"), dated as of April 8, 1997, between you and NGC Corporation, is
hereby terminated and of no further force and effect and (ii) the payments
granted to you pursuant to clauses (x) and (y) of this Paragraph 3(d) are in
full satisfaction of all of the Company's remaining duties and obligations under
the Employment Agreement.
(e) Upon the Effective Date, any options granted to you prior to
November 1, 1999 shall become vested.
(f) You will be entitled to participate in Dynegy's benefits
programs for senior management executives, including, without limitation,
Dynegy's deferred compensation plan for executives. Without limiting the
foregoing, you will be entitled to participate in such other plans and receive
such other perquisites as the Board of Directors in its sole discretion
determines, including, but not limited to, reserved parking, club memberships,
use of aircraft owned or leased by the Company, annual physical examination,
financial and/or federal income tax planning and tax return preparation, the
allocable cost of which plans and perquisites to you are not to exceed $25,000
annually. Pursuant to the terms of Dynegy's vacation policy you will be entitled
to four (4) weeks per year of paid vacation.
(g) 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 Dynegy'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.
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
<PAGE> 6
Mr. John U. Clarke
January 11, 2000
Page 6
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. 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 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 that period of time following the termination of your employment
for any reason other than pursuant to Paragraph 2(c) (i.e., in the event of a
termination pursuant to the first paragraph of Paragraph 2(c), the non-compete
obligations of this Paragraph 4(c) shall terminate) hereof through the
expiration of the Term or twenty-four (24) months from the date of termination,
whichever is later, 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,
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 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.,
<PAGE> 7
Mr. John U. Clarke
January II, 2000
Page 7
other than a nonjurisdictional marketing affiliate or production affiliate
(except as to such production affiliate's own production as described in clause
(ii) of this Paragraph 4(c)); or (iv) an integrated regulated electric and/or
gas utility as long as such utility does not engage in the unregulated marketing
of its generation or power trading other than that related to the generation or
power marketing allocated to its own service areas. 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.
(d) For a period of twenty-four (24) months after the expiration
or termination of your employment for whatever reason, other than pursuant to
Paragraph 2(c) above or for a period of twelve months following the termination
of your employment pursuant to Paragraph 2(c) above, you shall not solicit,
raid, entice, encourage or induce any person who at the time of such expiration
or termination of employment is an employee of the Company, or any of its
subsidiaries or affiliated companies, to become employed by any person, firm or
corporation, and you shall not approach any such employee for such purpose or
authorize or knowingly approve the taking of such actions by any other person,
firm or corporation or assist any such person, firm or corporation in taking
such action.
(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.
Accordingly, you consent and agree that if you violate any of the
provisions of this Paragraph 4, the Company and its subsidiaries and affiliated
companies would sustain irreparable harm and, therefore, in addition to any
other remedies which the Company may have under this Agreement or otherwise, the
Company shall be entitled to an injunction from any court of competent
jurisdiction restraining you from committing or continuing any such violation of
this Paragraph 4. You acknowledge that damages at law would not be an adequate
remedy for violation of this Paragraph 4, and you therefore agree that the
provisions of this Paragraph 4 may be specifically enforced against you in any
court of competent jurisdiction. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies available to the
Company for such breach or threatened breach, including the recovery of damages
from you.
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
<PAGE> 8
Mr. John U. Clarke
January 11, 2000
Page 8
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, to the fullest extent permitted
under applicable law, 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. The foregoing indemnification provisions shall be in addition to any other
rights to indemnification to which you may be entitled.
6. ARBITRATION
The parties hereto may attempt to resolve any dispute hereunder
informally via mediation or other means. Otherwise, any controversy or claim
arising out of or relating to this Agreement, or any breach thereof, shall,
except as provided in Paragraph 4, be adjudged 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 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 expenses reasonably incurred by you; provided further, 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. EXCISE TAXES
(a) In the event that any payment or benefit received or to be
received by you pursuant to the terms of this Agreement in connection with and
contingent on the termination of your employment with the Company (the "Contract
Payments") or of any other plan,
<PAGE> 9
Mr. John U. Clarke
January 11, 2000
Page 9
arrangement or agreement of the Company (or any affiliate) ("Other Payments"
and, together with the Contract Payments, the "Payments") would be subject to
the excise tax (the "Excise Tax") imposed by Section 4999 of the Internal
Revenue Code of 1986 (as amended from time to time, the "Code") as determined as
provided below, the Company shall pay to you, at the time specified in Section
7(b) below, an additional amount (the "Gross-Up Payment") such that the net
amount retained by you, after deduction of the Excise Tax on Payments and any
federal, state and local income tax and the Excise Tax upon the Gross-Up
Payment, and any interest, penalties or additions to tax payable by you with
respect thereto, shall be equal to the total present value (using the applicable
federal rate (as defined in Section 1274(d) of the Code in such calculation) of
the Payments at the time such Payments are to be made. The Company shall have
the right to make any such Gross-Up Payment, in whole or in part, in the form of
a noncash payment of equal value (as determined by Independent Counsel) to that
portion of the Gross-Up Payment had it been paid in cash, For purposes of
determining whether any of the Payments will be subject to the Excise Tax and
the amounts of such Excise Tax, (1) the total amount of the Payments shall be
treated as "parachute payments" within the meaning of section 280G(b)(2) of the
Code, and all "excess parachute payments" within the meaning of section
280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to
the extent that, in the opinion of independent counsel selected by the Company
and reasonably acceptable to you ("Independent Counsel"), a Payment (in whole or
in part) does not constitute a "parachute payment" within the meaning of section
280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in
part) are not subject to the Excise Tax, (2) the amount of the Payments that
shall be treated as subject to the Excise Tax shall be equal to the lesser of
(A) the total amount of the Payments or (B) the amount of "excess parachute
payments" within the meaning of section 280G(b)(1) of the Code (after applying
clause (1) hereof), and (3) the value of any noncash benefits or any deferred
payment or benefit included in the Payments or Gross-Up Payment, as applicable,
shall be determined by Independent Counsel in accordance with the principles of
sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount
of the Gross-Up Payment, you shall be deemed to pay federal income taxes at the
highest marginal rates of federal income taxation applicable to the individuals
in the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rates of taxation applicable to
individuals as are in effect in the state and locality of your residence in the
calendar year in which the Gross-Up Payment is to be made, net of the maximum
reduction in federal income taxes that can be obtained from deduction of such
state and local taxes, taking into account any limitations applicable to
individuals subject to federal income tax at the highest marginal rates.
(b) The Gross-Up Payments provided for in Paragraph 7(a) hereof
shall be made upon the earlier of (i) the payment to you of any Payment or (ii)
the imposition upon you or payment by you of any Excise Tax.
(c) If it is established pursuant to a final determination of a
court or an Internal Revenue Service proceeding or the opinion of Independent
Counsel that the Excise Tax is less than the amount taken into account under
Section 7(a) hereof, you shall repay to the Company within thirty (30) days of
your receipt of notice of such final determination or opinion the portion of the
Gross-Up Payment attributable to such reduction (plus the portion of the
Gross-Up Payment attributable to the Excise Tax and federal, state and local
income tax imposed
<PAGE> 10
Mr. John U. Clarke
January 11, 2000
Page 10
on the Gross-Up Payment being repaid by you if such repayment results in a
reduction in Excise Tax or a federal, state and local income tax deduction) plus
any interest received by you on the amount of such repayment. If it is
established pursuant to a final determination of a court or an Internal Revenue
Service proceeding or the opinion of Independent Counsel that the Excise Tax
exceeds the amount taken into account hereunder (including by reason of any
payment the existence or amount of which cannot be determined at the time of the
Gross-Up Payment), the Company shall make an additional Gross-Up Payment in
respect of such excess within thirty (30) days of the Company's receipt of
notice of such final determination or opinion.
(d) In the event of any change in, or further interpretation of,
sections 280G or 4999 of the Code and the regulations promulgated thereunder,
you shall be entitled, by written notice to the Company, to request an opinion
of Independent Counsel regarding the application of such change to any of the
foregoing, and the Company shall use its best efforts to cause such opinion to
be rendered as promptly as practicable. All fees and expenses of such
Independent Counsel incurred in connection with this Agreement shall be borne by
the Company.
8. 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) Except as otherwise provided in Paragraph 7 hereof, all payments to
you under this Agreement will be subject to the withholding of all applicable
employment taxes and income taxes; provided, however, that at your request the
parties hereto will use reasonable efforts to explore alternatives to allow the
Company to make charitable contributions on behalf of the employee by
redirecting a portion of your annual bonuses to charitable organization(s)
chosen by you in accordance with Paragraph 3(b) of this Agreement.
(e) 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 of Directors. 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
<PAGE> 11
Mr. John U. Clarke
January 11, 2000
Page 11
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.
(f) 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:
John U. Clarke Dynegy Inc.
6540 Rutgers 1000 Louisiana, Suite 5800
Houston, TX 77005 Houston, TX 77002
Attn: Chief Executive Officer
(g) 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.
(h) Neither you nor the Company will make or authorize any public
statement disparaging the other in its or his business interests and affairs.
Notwithstanding the foregoing, neither party shall be (i) required to make any
statement which it or he believes to be false or inaccurate, or (ii) restricted
in connection with any litigation, arbitration or similar proceeding or with
respect to its response to any legal process. The provisions in this Paragraph
8(h) shall survive the termination of your employment hereunder, irrespective of
the reason therefor.
(i) The waiver by the Company of breach of any provision of this
Agreement by you shall not operate or be construed as a waiver of any subsequent
breach by you. The waiver by you of a breach of any provision of this Agreement
by the Company shall not operate or be construed as a waiver of any subsequent
breach by the Company.
(j) 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.
<PAGE> 12
Mr. John U. Clarke
January 11, 2000
Page 12
(k) If any provision of this Agreement as applied to either party
or to any circumstances shall be adjudged by a court of competent jurisdiction
to be void or unenforceable, the same shall in no way affect any other provision
of this Agreement or the validity or enforceability of this Agreement.
(l) The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(m) This Agreement may be executed in one or more counterparts,
which shall, collectively and separately, constitute one agreement.
(n) Notwithstanding anything to the contrary set forth in this
Agreement, the Company may cause any of its subsidiaries for which you render
services to pay or otherwise satisfy, in whole or in part, some or all of the
Company's obligations hereunder.
<PAGE> 13
Mr. John U. Clarke
January 11, 2000
Page 13
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.
DYNEGY INC.
By:
---------------------------------
Name: Charles L. Watson
Title: Chairman & CEO
AGREED AND ACCEPTED
this day of January, 2000
-----
- --------------------------------
John U. Clarke
<PAGE> 1
EXECUTION COPY
EXHIBIT 10.12
January 11, 2000
Kenneth E. Randolph
9537 Bayou Brook
Houston, TX 77063
Dear Ken:
Set forth below are the terms of your employment (the "Agreement") with
Dynegy Inc. (hereinafter referred to as "Dynegy" or the "Company").
1. TITLE AND DUTIES
Your title shall be General Counsel. You will be responsible for
Legal, Regulatory and Legislative Affairs and shall have such other duties as
may be delegated from time to time by your immediate supervisor. You will be
employed at Dynegy's headquarters in Houston, Texas. You shall devote your full
time, energy and skill to the performance of your duties for Dynegy, and will
exercise due diligence and reasonable care in the performance of such duties.
During the Term (as defined below) of this Agreement, you shall report to the
Company's Chief Executive Officer.
2. TERM
(a) Unless earlier terminated as provided for herein, the term of
this Agreement will be for two (2) years, beginning on the Effective Date and
ending on the second anniversary of the Effective Date (such period, as extended
pursuant to the next succeeding sentence, if applicable, the "Term"). The Term
shall automatically be extended for additional one (1) year periods unless
either the Company or you provides written notice at least sixty (60) days prior
to the date on which this Agreement would otherwise be automatically extended
that such party is electing not to so extend the Term. The term "Effective Date"
means the date of closing of the proposed merger of Dynegy Inc. and Illinova
Corporation pursuant to that certain Merger Agreement dated as of June 14, 1999,
as amended.
(b) If your employment with Dynegy 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
<PAGE> 2
Kenneth E. Randolph
January 11, 2000
Page 2
provisions of Paragraphs 5 and 6), 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) your refusal to implement or adhere to lawful policies or lawful
directives of the Board of Directors of Dynegy (the "Board of Directors") or
your immediate supervisor; (ii) serious misconduct, dishonesty or disloyalty,
directly related to the performance of your duties for the Company or gross
negligence in the performance of your duties for the Company; (iii) your being
convicted (or entering into a plea bargain admitting or not contesting criminal
guilt) in any criminal felony proceeding; (iv) drug or alcohol abuse; (v)
continued failure to perform your duties under this Agreement which is not cured
within ten (10) days after written notice of such failure is provided to you by
Dynegy; or (vi) any other material breach of this Agreement by you that is not
cured within ten (10) days after written notice of such breach is delivered to
you from 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
in lieu of further payments to you pursuant to Paragraph 3 hereof: (i) a lump
sum amount equal to the product of (x) 2.99 and (y) the greater of (a) the
average annual Base Salary and incentive compensation, whether payable in cash
or stock options, you were paid by the Company for the highest three (3)
calendar years preceding the calendar year in which your employment is
terminated (or such shorter period as you have actually been employed by the
Company), or (b) your Base Salary and target bonus amount for the year in which
your employment is terminated; (ii) a lump sum amount equal to the net present
value, as determined by the Board of Directors in its sole and absolute
discretion, of the benefits to be provided to you in Paragraphs 3(e) and 3(f) of
this Agreement and such other perquisites (if any) being provided to you on the
date of your termination, as if you were still employed for the remainder of the
Term of this Agreement, with regard to those benefits to be provided to you
during the Term of this Agreement, and as if you had completed the Term of this
Agreement with regard to those benefits to be provided to you upon completion of
the Term of this Agreement; (iii) any employee stock options granted to you
prior to or during the Term of this Agreement shall become vested as of the date
of your resignation due to such constructive termination or discharge not for
cause, and you shall have the right to exercise any such vested options through
the end of the Term of this Agreement or one year from the date of termination,
whichever is later; and (iv) for a period of thirty-six (36) months from the
date of such termination, all health and welfare benefits the Company was
maintaining for you and your family as of the date of such resignation or
discharge.
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), target range of annual
option grants under Paragraph 3(c)
<PAGE> 3
Kenneth E. Randolph
January 11, 2000
Page 3
or other compensation as described in Paragraphs 3(e) and 3(f) is reduced; (ii)
a significant diminution in your responsibilities, authority or scope of duties
is effected by the Board of Directors, and such diminution is made without your
written consent (without regard to whether or not any change is made to your
title); (iii) the Company materially breaches this Agreement; or (iv) the
relocation of the Company's principal executive offices to a location, or the
Company requires you to be based, outside a fifty (50) mile radius from the city
limits of Houston, Texas. Any resignation by you as a result of assertion of a
constructive termination shall be communicated by delivery to the Board of
Directors within thirty (30) days from the commencement of such constructive
termination by written notice setting forth 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
(30) period, such resignation shall take effect upon the expiration of thirty
(30) days from the date of the delivery of such notice. Any other resignation
by you shall be communicated by thirty (30) days' advance written notice.
(d) If you die, or become disabled and cannot perform your duties,
your employment hereunder shall be terminated immediately (except that the
confidentiality, noncompetition and nonsolicitation provisions of Paragraph 4
and the provisions of Paragraphs 5 and 6 shall survive the termination of your
employment) and: (i) you (or your estate) shall be entitled to the Base Salary
(as defined in Paragraph 3(a)) payable to you hereunder for twelve (12) months
following the month in which you die or become disabled, plus the amount of any
target bonus as described in Paragraph 3(b) for the year of death or disability,
prorated for the portion of the twelve-month period (12) elapsed in which the
death or disability occurs; (ii) you (or your estate) shall receive, for a
period of twenty-four (24) months from the date of your death or disability, all
health insurance and health benefits that the Company was maintaining for you
and/or your estate and for your family as of the date of your death or
disability; and (iii) any employee stock options granted to you during the Term
of this Agreement shall become vested as of the date of your death or disability
on the same terms as provided for the vesting of stock options in Paragraph 2(c)
above. 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).
(e) Unless otherwise specified herein, all payments under this
Agreement shall be paid in a lump sum, less applicable withholding taxes, within
thirty (30) days following the date of your termination.
3. COMPENSATION
(a) Each year during the Term hereof, you will be paid a base
salary of $350,000 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.
<PAGE> 4
Kenneth E. Randolph
January 11, 2000
Page 4
(b) You shall be a participant in the Company's Incentive Compensation
Plan. As part of Dynegy's incentive compensation program, you will have the
opportunity to earn a target bonus in an amount equal to 100% of your Base
Salary and a maximum cash award in an amount equal to 200% of your Base Salary,
dependent upon certain financial or performance objectives, determined in
accordance with such program and by the Board of Directors. To the extent any
incentive compensation in excess of the maximum cash amount referenced above is
payable under the Incentive Compensation Plan in any year to you, the Company
will pay you any such amounts in noncash equivalents (e.g., stock options or
restricted securities of the Company) of equal value, as determined by the Board
of Directors in its sole and absolute discretion. At your election, in lieu of
paying you all or part of such incentive compensation bonus, the Company will
allow you to direct that all or part of such incentive compensation shall be
allocated by the Company to, or expended directly for, charitable contributions
of your selection.
(c) Upon the Effective Date, you will receive (x) stock option grants
pursuant to the Company's Long-Term Incentive Plan ("LTIP") with a projected
value equal to 225% of your Base Salary and (y) discounted stock option grants
under the Employee Equity Option Plan ("EEOP"; and, together with LTIP, the
"Stock Option Plans") with an in-the-money value equal to $250,000. Your EEOP
options shall become 40% vested and exercisable on the second anniversary of the
Effective Date provided you are employed by the Company on such date. The
aforementioned options will vest in accordance with the vesting provisions of
each of the Stock Option Plans. Each year during the Term of this Agreement, you
will be eligible to receive stock option grants in accordance with the
requirements and provisions of the Company's LTIP. The current target range for
annual option grants for your position is a median of 150% and a 75th percentile
of 225% of your Base Salary. You recognize that any value of an award of
"market" options under the LTIP is a projected value, which is subject to the
future 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 the 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 the stated value in excess of the exercise price. These
options are subject to the vesting, forfeiture and other terms and conditions of
the respective Stock Option Plan, except as specifically provided to the
contrary in this Agreement.
(d) Upon the Effective Date, any EEOP or other options granted to you
prior to November 1,1999 shall become vested.
(e) You will be entitled to participate in Dynegy's benefits programs
for senior management executives, including, without limitation, Dynegy's
deferred compensation plan for executives. Without limiting the foregoing, you
will be entitled to participate in such other plans and receive such other
perquisites as the Board of Directors in its sole discretion determines,
including, but not limited to, reserved parking, club memberships, use of
aircraft owned or leased by the Company, annual physical examination, financial
and/or federal income tax planning and tax return preparation, the allocable
cost of which plans and perquisites to you are not to exceed $25,000 annually.
Pursuant to the terms of Dynegy's vacation policy you will be entitled to four
(4) weeks per year of paid vacation.
<PAGE> 5
Kenneth E. Randolph
January 11, 2000
Page 5
(f) 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 Dynegy'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.
(g) Upon the Effective Date, the Company shall pay you a signing bonus
in the amount of $100,000. You and the Company acknowledge and agree that: (i)
as of the Effective Date, that certain Employment Agreement (as the same may
have been amended, modified or supplemented from time to time, the "Employment
Agreement"), dated as of January 1, 1997, between you and NGC Corporation, is
hereby terminated and of no further force and effect and (ii) the payment
granted to you pursuant to this Paragraph 3(g) is in full satisfaction of all of
the Company's remaining duties and obligations under the Employment Agreement.
4. CONFIDENTIALITY/NONCOMPETE/NONSOLICITATION
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
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.
<PAGE> 6
Kenneth E. Randolph
January 11, 2000
Page 6
(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 that period of time following the termination of your employment
for any reason other than pursuant to Paragraph 2(c) above (i.e., in the event
of a termination pursuant to the first paragraph of Paragraph 2(c), the
non-compete obligations of this Paragraph 4(c) shall terminate) through the
expiration of the Term, 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 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 affiliate's own
production as described in clause (ii) of this Paragraph 4(c)); or (iv) an
integrated regulated electric and/or gas utility as long as such utility does
not engage in the unregulated marketing of its generation or power trading other
than that related to the generation or power marketing allocated to its own
service areas. 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.
(d) For a period of twenty-four (24) months after the expiration or
termination of your employment for whatever reason other than pursuant to
Paragraph 2(c) above or for a period of twelve months following the termination
of your employment pursuant to Paragraph 2(c) above, you shall not solicit,
raid, entice, encourage or induce any person who at the time of such expiration
or termination of employment is an employee of the Company, or any of its
subsidiaries or affiliated companies, to become employed by any person, firm or
corporation, and you shall not approach any such employee for such purpose or
authorize or knowingly approve the taking of such actions by any other person,
firm or corporation or assist any such person, firm or corporation in taking
such action.
(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
<PAGE> 7
Kenneth E. Randolph
January 11, 2000
Page 7
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.
Accordingly, you consent and agree that if you violate any of the
provisions of this Paragraph 4, the Company and its subsidiaries and affiliated
companies would sustain irreparable harm and, therefore, in addition to any
other remedies which the Company may have under this Agreement or otherwise, the
Company shall be entitled to an injunction from any court of competent
jurisdiction restraining you from committing or continuing any such violation
of this Paragraph 4. You acknowledge that damages at law would not be an
adequate remedy for violation of this Paragraph 4, and you therefore agree that
the provisions of this Paragraph 4 may be specifically enforced against you in
any court of competent jurisdiction. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies available to the
Company for such breach or threatened breach, including the recovery of damages
from you.
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, to the fullest extent permitted under applicable
law, 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.
The foregoing indemnification provisions shall be in addition to any other
rights to indemnification to which you may be entitled.
6. ARBITRATION
The parties hereto may attempt to resolve any dispute hereunder
informally via mediation or other means. Otherwise, any controversy or claim
arising out of or relating to this Agreement, or any breach thereof, shall,
except as provided in Paragraph 4, be adjudged only by
<PAGE> 8
Kenneth E. Randolph
January 11, 2000
Page 8
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 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 expenses reasonably incurred by you;
provided further, 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) All payments to you under this Agreement will be subject to the
withholding of all applicable employment taxes and income taxes; provided,
however, that at your request the parties hereto will use reasonable efforts to
explore alternatives to allow the Company to make charitable contributions on
behalf of the employee by redirecting a portion of your annual bonuses to
charitable organization(s) chosen by you in accordance with Paragraph 3(b) of
this Agreement.
(e) 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 of Directors. 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
<PAGE> 9
Kenneth E. Randolph
January 11, 2000
Page 9
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.
(f) 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:
Kenneth E. Randolph Dynegy Inc.
9537 Bayou Brook 1000 Louisiana, Suite 5800
Houston, TX 77063 Houston, TX 77002
Attn: Chief Executive Officer
(g) 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.
(h) Neither you nor the Company will make or authorize any public
statement disparaging the other in its or his business interests and affairs.
Notwithstanding the foregoing, neither party shall be (i) required to make any
statement which it or he believes to be false or inaccurate, or (ii) restricted
in connection with any litigation, arbitration or similar proceeding or with
respect to its response to any legal process. The provisions in this Paragraph
7(h) shall survive the termination of your employment hereunder, irrespective of
the reason therefor.
(i) The waiver by the Company of breach of any provision of this
Agreement by you shall not operate or be construed as a waiver of any subsequent
breach by you. The waiver by you of a breach of any provision of this Agreement
by the Company shall not operate or be construed as a waiver of any subsequent
breach by the Company.
(j) 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.
(k) If any provision of this Agreement as applied to either party or
to any circumstances shall be adjudged by a court of competent jurisdiction to
be void or unenforceable,
<PAGE> 10
Kenneth E. Randolph
January 11, 2000
Page 10
the same shall in no way affect any other provision of this Agreement or the
validity or enforceability of this Agreement.
(l) The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(m) This Agreement may be executed in one or more counterparts, which
shall, collectively and separately, constitute one agreement.
(n) Notwithstanding anything to the contrary set forth in this
Agreement, the Company may cause any of its subsidiaries for which you render
services to pay or otherwise satisfy, in whole or in part, some or all of the
Company's obligations hereunder.
<PAGE> 11
Kenneth E. Randolph
January 11, 2000
Page 11
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.
DYNEGY INC.
By:
----------------------------------
Name: Charles L. Watson
Title: Chairman & CEO
AGREED AND ACCEPTED this
____ day of January, 2000
- ----------------------------
Kenneth E. Randolph
<PAGE> 1
EXHIBIT 10.57
FOURTH AMENDMENT TO
DYNEGY INC. PROFIT SHARING/401(k) SAVINGS PLAN
WHEREAS, Dynegy Inc. (the "Company") and other Employers have heretofore
adopted the Dynegy Inc. 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 January 1, 1998:
1. Section 3.1(e) of the Plan shall be amended by adding the following
sentence immediately following the first sentence of such Paragraph:
"For Plan Years beginning on or after January 1, 1997, such testing shall
utilize the current year testing method as such term is defined in Internal
Revenue Service Notice 98-1."
2. Section 3.5 of the Plan shall be amended by adding the following
sentence immediately following the second sentence of such Paragraph:
"'Qualified matching contributions' may be contributed to the Plan under
the preceding sentence for purposes of satisfying the restrictions set
forth in Section 3.1(e) only if the conditions described in Treasury
regulation Section 1.401(k)-1(b)(5) are satisfied."
3. The second sentence of Section 3.6 of the Plan shall be deleted and the
following shall be substituted therefor:
"For Plan Years beginning on or after January 1, 1997, such testing shall
utilize the current year testing method as such term is defined in Internal
Revenue Service Notice 98-1. 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 only if the conditions described in Treasury regulation
Section 1.401(m)-1(b)(5) are satisfied."
4. Clause (A) of Section 4.5(a)(3) of the Plan shall be deleted and the
following shall be substituted therefor:
"(A) $30,000 (with such amount to be adjusted automatically from and after
January 1, 1995, to reflect any cost-of-living adjustment authorized by
section 415(d) of the Code)"
<PAGE> 2
5. Section 4.5(a)(4) of the Plan shall be deleted and the following shall
be substituted therefor:
"(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 which are required to be reported on the
Member's federal income tax withholding statement or statements (Form W-2
or its subsequent equivalent), subject to the following adjustments and
limitations:
(A) The following shall be included:
(i) Elective deferrals (as defined in section 402(g)(3) of
the Code) from compensation to be paid by the Employer to the
Member;
(ii) Any amount which is contributed or deferred by the
Employer at the election of the Member and which is not
includible in the gross income of the Member by reason of section
125 or 457 of the Code; and
(iii) Any amounts that are not includable in the gross
income of the Member under a salary reduction agreement by reason
of the application of section 132(f) of the Code.
(B) The 415 Compensation of any Member taken into account for
purposes of the Plan shall be limited to $160,000 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."
6. Section 12.5(c) of the Plan shall be deleted and the following shall be
substituted therefor:
"(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 outstanding
loan (including interest) shall be so offset and repaid on the earlier of
(a) the last day of the Grace Period (as hereinafter defined) applicable
with respect to such failure to comply or (b) the date of 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 Accounts may not be offset and used to satisfy the
payment of such loan (including interest) prior to the earliest time such
amounts would otherwise be permitted to be distributed under applicable
law. For purposes
<PAGE> 3
of this Paragraph, the 'Grace Period' with respect to any failure to comply
with the repayment terms of a loan shall be the 90-day period beginning on
the date of such failure."
7. Section 15.5(a) of the Plan shall be deleted and the following shall be
substituted therefor:
"(a) The investment manager is (1) registered as an investment adviser
under the Investment Advisers Act of 1940, (2) not registered as an
investment adviser under such act by reason of paragraph (1) of section
203A of such act, is registered as an investment adviser under the laws of
the state (referred to in such paragraph (1)) in which it maintains its
principal office and place of business, and, at the time it last filed the
registration form most recently filed by it with such state in order to
maintain its registration under the laws of such state, also filed a copy
of such form with the Secretary of Labor, (3) a bank, as defined in the
Investment Advisers Act of 1940, or (4) an insurance company qualified to
do business under the laws of more than one state; and"
8. The phrase "and certain judgments and settlements" shall be added after
the phrase "qualified domestic relations orders" in the first sentence of
Section 19.2 of the Plan.
9. The following sentence shall be added to the end of Section 20.3(b) of
the Plan:
"If the Plan is deemed to be top-heavy for a Plan Year and the requirements
of section 416(h)(2) of the Code are not satisfied, then the defined
benefit and defined contribution plan fractions (as such terms are defined
in section 415(e) of the Code) shall be computed by substituting '1.0' for
'1.25' to the extent required by sections 416(h) and 415(e) of the Code."
II. Effective as of January 1, 2000:
1. The following sentence shall be added to the end of Section 1.1(29) of
the Plan:
"Further, a distribution from the Before-Tax Account of a Member who has
not attained age 59 1/2 pursuant to Section 11.1(c) shall not constitute an
Eligible Rollover Distribution."
2. Section 11.2(e) of the Plan shall be deleted and the following shall be
substituted therefor:
"(e) Any withdrawal hereunder which constitutes an Eligible Rollover
Distribution shall be subject to the Direct Rollover election described in
Section 10.5."
III. As amended hereby, the Plan is specifically ratified and reaffirmed.
-3-
<PAGE> 4
IN WITNESS WHEREOF, the undersigned has caused these presents to be
executed this _____ day of ________________, 1999.
DYNEGY INC.
BY:
-----------------------------------------
NAME:
------------------------------------
TITLE:
-----------------------------------
-4-
<PAGE> 1
EXHIBIT 10.58
FIFTH AMENDMENT TO
DYNEGY INC. PROFIT SHARING/401(k) SAVINGS PLAN
WHEREAS, Dynegy Inc. (the "Company") and other Employers have
heretofore adopted the Dynegy Inc. 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
October 1, 1999:
1. Section 8.3 of the Plan shall be amended by adding the
following new Paragraph (g) to the end of such Section:
"(g) Paragraphs (b), (d), and (e) above
notwithstanding, if a Member shall cease to be employed during
the one-year period beginning on the date of the closing of
the Illinova Transaction by reason of an Involuntary
Termination (as such terms are hereinafter defined), then such
Member shall have a 100% Vested Interest in his Employer
Contribution Account. For purposes of this Paragraph (g), the
following terms shall have the meanings set forth below:
(1) 'Excluded Termination' shall mean any termination
of a Member's employment with the Employer by reason of a
merger, acquisition, sale, transfer, outsourcing,
reorganization or restructuring of all or part of the
Employer or any affiliate or division thereof where either
(i) such Member is offered another position within the
Employer that provides such Member with a base salary at
least equal to or greater than his base salary in effect on
the last day of such Member's active service for the
Employer (including, without limitation, a position that
would require such Member to transfer to a different work
location so long as he has been offered the Employer's
standard relocation package in connection with such
transfer) or (ii) such Member accepts any position with a
successor company (as hereafter defined), including an
outside contractor, whether affiliated or unaffiliated with
the Employer. For purposes of the preceding sentence, a
successor company is (A) any entity that assumes operations
or functions formerly carried out by the Employer (such as
the buyer of a facility, asset or division or any entity to
which the Employer operation or function has been
outsourced), (B) any affiliate of the Employer, or (C) any
entity making the job offer at the request of the Employer
(such as a joint venture of which the Employer or an
affiliate is a member).
(2) 'Illinova Transaction' shall mean the
transactions contemplated in that certain Agreement and
Plan of Merger dated as of June 14, 1999, by and among
Illinova Corporation, Energy Convergence Holding
<PAGE> 2
Company, Energy Convergence Acquisition Corporation, Dynegy
Acquisition Corporation, and the Company, as the same may be
amended from time to time.
(3) 'Involuntary Termination' shall mean, with
respect to each Member, any termination of such Member's
employment with the Employer; provided, however, that the term
`Involuntary Termination' shall not include a voluntary
resignation by such Member, an Excluded Termination, a
Termination for Cause, or any termination as a result of such
Member's death or total and permanent disability (as defined
in Section 7.2).
(4) 'Termination for Cause' shall mean any
termination of a Member's employment with the Employer by
reason of such Member's (i) conviction of a misdemeanor
involving moral turpitude or a felony, (ii) engagement in
conduct which is materially injurious (monetarily or
otherwise) to the Employer or any of its affiliates
(including, without limitation, misuse of the Employer's or an
affiliate's funds or other property), (iii) engagement in
gross negligence or willful misconduct in the performance of
such individual's duties, (iv) willful refusal without proper
legal reason to perform such individual's duties and
responsibilities, (v) material breach of any material
provision of any agreement between the Employer and such
individual, or (vi) material breach of any material corporate
policy maintained and established by the Employer that is of
general applicability to Members."
2. 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 ________________, 1999.
DYNEGY INC.
BY:
---------------------------
NAME:
--------------------
TITLE:
--------------------
-2-
<PAGE> 1
EXHIBIT 10.59
SIXTH AMENDMENT TO
DYNEGY INC. PROFIT SHARING/401(K) SAVINGS PLAN
WHEREAS, Dynegy Inc. (the "Company") and other Employers have
heretofore adopted the Dynegy Inc. 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
December ____, 1999:
1. Section 1.1(56) of the Plan shall be amended by adding the
following new sentence to the end of such Section:
"Solely for purposes of the preceding sentence and Sections 3.3,
4.2(c), and 4.2(d), a Facility Employee (as hereinafter defined) shall
be considered employed by the Employer on the last day of the Plan Year
beginning on January 1, 1999. A 'Facility Employee' means each
individual who was employed by the Employer at the Employer's Texarkana
facility, New Hope facility, East Texas facility, Myrtle Springs
facility, Ginger facility, or Eustace facility (collectively, the
'Facilities') immediately prior to the sale of the Facilities to
Sulphur River Gathering L.P. or an affiliate thereof."
2. 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, 1999.
DYNEGY INC.
BY:
----------------------
NAME:
-----------------
TITLE:
-----------------
<PAGE> 1
EXHIBIT 10.60
SEVENTH AMENDMENT TO
DYNEGY INC. PROFIT SHARING/401(K) SAVINGS PLAN
WHEREAS, Dynegy Inc. (the "Company") and other Employers have
heretofore adopted the Dynegy Inc. 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 ____, 2000:
1. Section 10.5 of the Plan shall be amended by adding the
following sentences to the end of such Section:
"Notwithstanding the foregoing or any other provision in the Plan to
the contrary, the Eligible Rollover Distribution of a DOCC Member (as
hereinafter defined) may, at the election of such DOCC Member, include
any outstanding loan from the Plan to such DOCC Member provided that
(A) no portion of such loan is funded from such DOCC Member's After-Tax
Account, (B) the Eligible Retirement Plan that will receive such
Eligible Rollover Distribution (or the portion thereof that includes
any such loan) is maintained by El Paso Energy Corporation or an
affiliate thereof, (C) such Eligible Retirement Plan will accept such
Eligible Rollover Distribution (including such loan), and (D) such DOCC
Member's election to have such Eligible Rollover Distribution
(including such loan) paid directly to such Eligible Retirement Plan is
made prior to June 1, 2000, in the manner prescribed by the Committee.
A 'DOCC Member' means each Member who was employed by Dynegy Operating
Company California, Inc. at the time of the sale of such corporation to
El Paso Energy Corporation or an affiliate thereof."
2. 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 January, 2000.
DYNEGY INC.
BY:
------------------------------
NAME:
-------------------------
TITLE:
-------------------------
<PAGE> 1
DYNEGY INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($ IN 000'S)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995 1994
-------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Computation of Earnings:
Pre-tax income (loss) from continuing operations $226,526 $158,691 $(149,895) $169,645 $ 65,234 $ 44,105
Undistributed income from equity Investees 13,754 6,477 4,073 21,729 9,169 3,803
-------- -------- --------- -------- -------- --------
Computed Earnings (Loss) 212,772 152,214 (153,968) 147,916 56,065 40,302
-------- -------- --------- -------- -------- --------
Fixed Charges:
Interest costs:
Expensed 75,730 73,672 63,455 46,202 34,475 1,114
Capitalized 16,695 7,591 8,800 1,200 1,028 --
Minority interest in income of a subsidiary 16,632 16,632 9,841 -- -- --
Amortization of financing costs 2,434 1,320 943 772 1,132 1,267
Amortization of Premium -- (2,568) (6,768) (4,892) (3,216) --
Rental expense representative of interest factor 13,786 20,698 13,572 4,171 3,719 955
-------- -------- --------- -------- ------- --------
Total Fixed Charges 125,277 117,345 89,843 47,453 37,138 3,336
-------- -------- --------- -------- ------- --------
Earnings Before Income Taxes and Fixed Charges $321,354 $261,968 $ (72,925) $194,169 $92,175 $ 43,638
======== ======== ========= ======== ======= ========
Ratio of Earnings to Fixed Charges 2.56 2.23 (a) 4.09 2.48 13.08
======== ======== ========= ======== ======= ========
</TABLE>
(a) Earnings are inadequate to cover fixed charges for the year ended December
31, 1997, by approximately $72.9 million.
<PAGE> 1
EXHIBIT 22.1
SUBSIDIARIES OF DYNEGY INC.
AS OF 12/31/99
<TABLE>
<CAPTION>
SUBSIDIARY STATE OR JURISDICTION OF INCORPORATION
- ---------- --------------------------------------
<S> <C> <C>
1. Dynegy Power Corp. Delaware
2. Dynegy Global Energy, Inc. Delaware
3. DMT Holdings, Inc. Delaware
4. Dynegy GP Inc. Delaware
5. Dynegy Midstream, Inc. Delaware
6. Dynegy Regulated Holdings, Inc. Delaware
7. Dynegy Upper Holdings, LLC Delaware
8. Dynegy Administrative Services Company Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 (File No's. 333-96045 and 333-96047) and
Form S-3 (File No. 333-31394).
ARTHUR ANDERSEN LLP
Houston, Texas
March 1, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 45,230 28,367
<SECURITIES> 0 0
<RECEIVABLES> 2,041,416 1,623,738
<ALLOWANCES> 0 0
<INVENTORY> 271,884 149,901
<CURRENT-ASSETS> 2,805,080 2,117,241
<PP&E> 2,575,100 2,446,878
<DEPRECIATION> (557,219) (514,771)
<TOTAL-ASSETS> 6,525,171 5,264,237
<CURRENT-LIABILITIES> (2,538,523) (2,026,323)
<BONDS> 0 0
0 0
(75,418) (75,418)
<COMMON> (1,575) (1,533)
<OTHER-SE> (1,232,489) (1,126,530)
<TOTAL-LIABILITY-AND-EQUITY> (6,525,171) (5,264,237)
<SALES> (15,429,976) (14,257,997)
<TOTAL-REVENUES> (15,429,976) (14,257,997)
<CGS> 14,886,101 13,829,310
<TOTAL-COSTS> 14,886,101 13,829,310
<OTHER-EXPENSES> 45,519 7,677
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 78,164 74,992
<INCOME-PRETAX> (226,526) (158,691)
<INCOME-TAX> 74,677 50,338
<INCOME-CONTINUING> (151,849) (108,353)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (151,849) (108,353)
<EPS-BASIC> 0.98 0.71
<EPS-DILUTED> 0.91 0.66
</TABLE>
