<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
|_| 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 No.)
1000 Louisiana, Suite 5800
Houston, Texas 77002
(Address of principal executive offices)
(Zip Code)
(713) 507-6400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date: Class A Common stock, no par value per share,
110,369,797 shares outstanding as of May 11, 2000, Class B, no par value,
41,814,305 shares outstanding as of May 11, 2000
Page 1 of 31
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DYNEGY INC.
TABLE OF CONTENTS
<TABLE>
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Page
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PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets:
March 31, 2000 and December 31, 1999............................................. 3
Condensed Consolidated Statements of Operations:
For the three months ended March 31, 2000 and 1999............................... 4
Condensed Consolidated Statements of Cash Flows:
For the three months ended March 31, 2000 and 1999............................... 5
Notes to Condensed Consolidated Financial Statements................................. 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 29
Item 2. Not Applicable........................................................... --
Item 3. Not Applicable........................................................... --
Item 4. Not Applicable........................................................... --
Item 5. Not Applicable........................................................... --
Item 6. Exhibits and Reports on Form 8-K......................................... 30
</TABLE>
Page 2 of 31
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DYNEGY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ --------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,068 $ 45,230
Accounts receivable, net 2,098,928 1,992,450
Accounts receivable, affiliates 60,454 48,966
Inventories 141,871 271,884
Assets from risk management activities 882,166 379,833
Prepayments and other assets 302,682 66,717
----------- ----------
3,488,169 2,805,080
----------- ----------
Property, Plant and Equipment 6,813,591 2,575,100
Less: accumulated depreciation (514,294) (557,219)
----------- ----------
6,299,297 2,017,881
----------- ----------
Other Assets:
Investments in unconsolidated affiliates 688,588 627,335
Assets from risk management activities 562,584 452,913
Intangible assets, net of amortization 1,402,634 364,743
Other assets 601,077 257,219
----------- ----------
$13,042,349 $6,525,171
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,596,543 $1,667,199
Accounts payable, affiliates 177,099 161,500
Accrued liabilities 528,828 184,013
Liabilities from risk-management activities 717,649 334,080
Notes payable and current portion of long-term debt 476,278 191,731
----------- ----------
3,496,397 2,538,523
Long-Term Debt 3,406,264 1,299,333
Other Liabilities:
Transitional Funding Trust Notes 750,932 --
Liabilities from risk management activities 473,242 321,252
Deferred income taxes 1,474,194 335,190
Other long-term liabilities 793,636 521,391
----------- ----------
10,394,665 5,015,689
----------- ----------
Company Obligated Preferred Securities of
Subsidiary Trust 439,027 200,000
Commitments and Contingencies (Note 776)
Stockholders' Equity:
Preferred Stock, $0.01 par value, 50,000,000 shares
authorized; 8,000,000 shares designated as Series A
Participating Preferred Stock, 7,815,363 shares
issued and outstanding at September 30, 1999 and
December 31, 1999 -- 75,418
Preferred Stock, no par value, 70,000,000 shares
authorized; 6,697,776 shares designated as Series A
Convertible Preferred Stock and outstanding at
March 31, 2000 116 --
Common stock, $0.01 par value, 400,000,000 shares
authorized; 157,499,001 shares issued and outstanding
at December 31, 1999 -- 1,575
Class A Common Stock, no par value, 300,000,000 shares
authorized; 99,521,250 shares issued and outstanding
at March 31, 2000 1,223,886 --
Class B Common stock, no par value, 120,000,000 shares
authorized; 40,521,250 shares issued and outstanding at
March 31, 2000 649,726 --
Additional paid-in capital -- 973,000
Cumulative translation adjustment (1,681) --
Retained earnings 336,610 277,074
Less: treasury stock, at cost; 1,200,700 shares at
December 31, 1999 -- (17,585)
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2,208,657 1,309,482
----------- ----------
$13,042,349 $6,525,171
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
Page 3 of 31
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DYNEGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) (in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Revenues $5,349,267 $3,044,973
Cost of sales 4,966,427 2,924,896
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Operating margin 382,840 120,077
Depreciation and amortization 110,915 31,288
General and administrative expenses 89,781 49,542
---------- ----------
Operating income
Equity in earnings of unconsolidated affiliates 12,802 15,063
Other income 57,518 13,918
Interest expense (74,114) (19,234)
Other expenses (55,216) (4,153)
Minority interest in income of a subsidiary (9,074) (4,158)
---------- ----------
Income before income taxes 114,060 40,683
Income tax provision 45,054 12,612
---------- ----------
Net Income $ 69,006 $ 28,071
========== ==========
Net Income Per Share:
Net income $ 69,006 $ 28,071
Less: preferred stock dividends (3,378) (96)
---------- ----------
Net income applicable to common stockholders $ 65,628 $ 27,975
========== ==========
Basic earnings per share $ 0.47 $ 0.27
========== ==========
Diluted earnings per share $ 0.45 $ 0.25
========== ==========
Basic shares outstanding 137,117 105,219
========== ==========
Diluted shares outstanding 145,954 113,496
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
Page 4 of 31
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DYNEGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in thousands)
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<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 69,006 $ 28,071
Items not affecting cash flows from
operating activities:
Depreciation and amortization 113,195 29,316
Equity in earnings of affiliates, net of
cash distributions (6,975) (9,593)
Risk management activities (76,315) (8,424)
Deferred income taxes 45,004 14,568
Other (10,186) (2,519)
Changes in assets and liabilities resulting
from operating activities:
Accounts receivable (25,702) 189,963
Inventories 209,486 35,314
Prepayments and other assets 51,803 28,494
Accounts payable (151,926) (288,038)
Accrued liabilities (18,036) (20,852)
Other, net (57,184) (8,059)
----------- ---------
Net cash provided by operating activities 142,170 (11,759)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (227,250) (99,918)
Investment in unconsolidated affiliates, net (8,507) (1,418)
Proceeds from asset sales 667,111 16,650
Acquisition of business, net of cash acquired (1,110,965) --
Other, net -- (39,060)
----------- ---------
Net cash used in investing activities (679,611) (123,746)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 296,697 --
Repayments of long-term borrowings (93,818) (6,319)
Net proceeds from commercial paper and money
market lines of credit 64,849 127,072
Proceeds from sales of capital stock,
options and warrants 231,358 10,519
Other, net (4,807) (12,050)
------------ ---------
Net cash provided by financing activities 494,279 119,222
------------ ---------
Net change in cash and cash equivalents (43,162) (16,283)
Cash and cash equivalents, beginning of period 45,230 28,367
------------ ---------
Cash and cash equivalents, end of period $ 2,068 $ 12,084
============ =========
</TABLE>
See notes to condensed consolidated financial statements.
Page 5 of 31
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DYNEGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Interim Periods Ended March 31, 2000 and 1999
Note 1 -- Accounting Policies
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to interim financial
reporting as prescribed by the Securities and Exchange Commission ("SEC"). These
interim financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1999, filed with the SEC.
The financial statements include all material adjustments, which, in
the opinion of management, were necessary for a fair presentation of the results
for the interim periods. Interim period results are not necessarily indicative
of the results for the full year. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to develop estimates and make assumptions that affect reported
financial position and results of operations and that impact the nature and
extent of disclosure, if any, of contingent assets and liabilities. Actual
results could differ from those estimates. Certain reclassifications have been
made to prior year amounts in order to conform with current year presentation.
Note 2 -- Business Combination
Dynegy completed its acquisition of Illinova Corporation ("Illinova")
on February 1, 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 former Dynegy. As a result
of these two concurrent mergers, Illinova and former Dynegy continue to exist as
wholly-owned subsidiaries of Dynegy Inc., and are referred to as Illinova
Holdings Inc. and Dynegy Holdings Inc., 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 and the influence of Chevron U.S.A. Inc.,
resulting from 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 reflects the assets
and liabilities of former Dynegy at historical book values and the assets and
liabilities of Illinova at allocated fair values. For accounting purposes, the
effective date of the merger was January 1, 2000. This date was selected as a
result of the following factors:
. Affirmative consent had been acquired from both shareholder groups prior to
January 1, 2000,
. All regulatory consents had been acquired prior to January 1, 2000,
. Material terms of the purchase and sale agreement for the qualifying
facilities, a condition precedent to the closing, had been negotiated on or
about January 1, 2000, and
. Board, executive, commercial, financial and regulatory oversight of Illinova's
operations had transferred to Dynegy on or about January 1, 2000.
In the combination, Dynegy shareholders, other than Chevron, NOVA Gas
Services (U.S.) Inc. ("NOVA") and BG Holdings, Inc., elected to exchange each
former 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 former Dynegy common stock, NOVA and the
parent of BG Holdings, Inc. each received a combination of cash, subject to
proration, and shares of Dynegy Series A Convertible Preferred Stock. Chevron
received 0.69 of a share of Dynegy Class B common stock in exchange for each
share of former Dynegy common stock and Series A Participating 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.
Page 6 of 31
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DYNEGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Interim Periods Ended March 31, 2000 and 1999
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 $1.08 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. On a long-term basis, Dynegy financed the acquisition of Illinova
through a combination of sales of common equity and non-strategic assets and
from cash flow derived from its operations. The purchase price allocation as
presented herein is considered preliminary and is dependent upon subsequent
asset sales, if any, and the ultimate resolution of certain pending legal and
other contingencies existing at the time of the acquisition.
The results of operations of the acquired Illinova assets are
consolidated with Dynegy's operations beginning January 1, 2000. The following
table reflects certain unaudited pro forma information for the period presented
as if the Illinova acquisition had taken place on January 1, 1999 (in thousands,
except per share data). Pro forma results include non-recurring after-tax gains
of $41.8 million, or $0.30 per share.
<TABLE>
<CAPTION>
Three-Month
Period Ended
March 31, 1999
--------------
<S> <C>
Pro forma revenues $3,583,100
Pro forma net income 87,300
Pro forma earnings per share 0.57
</TABLE>
Note 3 -- 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 options outstanding and a warrant. Shares associated with the
conversion of the Series A Convertible Preferred Stock were anti-dilutive for
the three-month period ended March 31, 2000. Shares outstanding and the
resulting computation of basic and diluted earnings per share for the quarter
ended March 31, 1999, have been restated to give effect to the fixed exchange
ratio contained in the terms of the Illinova acquisition.
Note 4 -- Capital Stock
In April 2000, Dynegy sold approximately 4.6 million primary shares of
common equity at $55.00 per share. The offering included approximately 3.3
million shares of Class A common stock sold to the public and approximately 1.3
million shares of Class B common stock sold to Chevron in a private transaction,
pursuant to Chevron's existing contractual right to maintain a defined level of
ownership interest in Dynegy. Total net proceeds to Dynegy as a result of these
transactions approximated $245.1 million. This amount was net of the
underwriting commissions and expenses of approximately $16.4 million. Proceeds
from the offering were used to reduce short-term indebtedness incurred in the
acquisition of Illinova. The offering also included approximately 5.2 million
shares of common stock sold by affiliates of BG Group plc and NOVA. Dynegy did
not receive any of the proceeds from the secondary sale of common stock. The
remaining shares of Series A Convertible Preferred Stock held by BG Group plc
and NOVA were converted to Class A common stock pursuant to the terms of the
secondary offering.
Note 5 -- Accounting Policy Change
The Company continues to analyze the effects of adoption of the rules
promulgated by Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133") as amended by
Page 7 of 31
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DYNEGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Interim Periods Ended March 31, 2000 and 1999
Financial Accounting Standard No. 137. Provisions in Statement No. 133 will
affect the accounting and disclosure of contractual arrangements and operations
of the Company. Provisions of Statement No. 133 must be applied to fiscal
periods beginning after June 15, 2000. Dynegy intends to adopt the
provisions of Statement No. 133 within the timeframe and in accordance with the
requirements provided by that statement. Management is currently assessing the
financial statement impact of the adoption; however, such impact is not
determinable at this time.
Management believes the adoption of the provisions of Statement No.
133 may affect the variability of future periodic results reported by Dynegy, as
well as its competitors, as market conditions and resulting 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.
Note 6 -- Unconsolidated Affiliates
At March 31, 2000, Dynegy's investment in unconsolidated affiliates
accounted for by the equity method included: a 25 percent participating
preferred stock interest in Accord Energy Limited, a United Kingdom limited
company; an approximate 23 percent interest in Venice Energy Services Company,
L.L.C.; a 38.75 percent partnership interest in Gulf Coast Fractionators; a 25
percent interest in Midstream Barge Company, L.L.C.; a 39 percent partnership
interest in West Texas LPG Pipeline, Limited Partnership; interests ranging from
eight to 50 percent in various entities, each formed to build (or buy), own and
operate power generation facilities located in the United States, the United
Kingdom, Asia and South America; a 50 percent interest in Tenaska Marketing
Ventures, a marketer of natural gas in the Midwestern United States and, through
affiliates, in Canada; a 33.33 percent interest in Waskom Gas Processing
Company, a partnership that owns and operates a natural gas processing,
extraction and fractionation facility; a 50 percent interest in NICOR Energy
L.L.C., a retail energy alliance located in the Midwest; and a 20 percent
interest in SouthStar Energy Services L.L.C., a retail energy alliance located
in the Southeast.
Also at March 31, 2000, the Company had three cost basis investments:
Altra Energy Technologies, Inc., Canadian Midstream Services, Ltd. and Compton
Petroleum Corporation. Summarized unaudited combined income statement
information for the unconsolidated affiliates accounted for by the equity method
is presented in the table below:
<TABLE>
<CAPTION>
Three-Months Ended March 31,
------------------------------------------
2000 1999
------------------ -------------------
Equity Equity
Total Share Total Share
------- ------- ------- -------
($ in thousands)
<S> <C> <C> <C> <C>
Revenues (1) $814,646 $296,517 $237,304 $93,670
Operating margin (1) $129,628 $ 37,035 $ 85,762 $34,098
Net income (1) $ 48,927 $ 6,945 $ 23,733 $10,247
</TABLE>
______________________
(1) The interim financial data for both periods presented is exclusive of
amounts attributable to the Company's investment in Accord as such
information was unavailable.
Page 8 of 31
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DYNEGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Interim Periods Ended March 31, 2000 and 1999
Note 7 -- Commitments and Contingencies
On August 3, 1998, Modesto Irrigation District ("MID") filed a lawsuit
against PG&E and Destec Energy, Inc. ("Destec") in federal court for the
Northern District of California, San Francisco division. The lawsuit alleges
violation of federal and state antitrust laws and breach of contract against
Destec. The allegations are related to a power sale and purchase arrangement in
the city of Pittsburg, 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
breach of contract and tortious interference with prospective economic relations
claims against Destec and tortious interference with contract and tortious
interference with prospective economic relations claims against PG&E. Motions to
dismiss MID's state court claims were heard by the state court and by order
dated April 6, 2000, MID was directed to amend its complaint. MID filed its
amended complaint on April 20, 2000, including Dynegy as a defendant. Dynegy
plans to file a motion to dismiss MID's amended complaint against Dynegy. 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, which was approved by the District Court
on April 20, 2000. The order approving the settlement also contains a bar
against any claim for contribution that might otherwise be asserted by Dow
against DPC. The settlement dismisses AES's suit against DPC with prejudice. The
settlement had no impact on Dynegy's results of operations or financial
position.
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. Subsequently, the DOJ and EPA amended the NOV and Complaint to
include Illinova Power Marketing, Inc. (now known as Dynegy Midwest Generation,
Inc. ("DMG")) (Illinois Power and DMG collectively the "Defendants"). 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 the
Defendants" 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
Page 9 of 31
<PAGE>
DYNEGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Interim Periods Ended March 31, 2000 and 1999
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. The Defendants filed an answer denying all claims and asserting various
specific defenses. By order dated April 19, 2000, a trial date of November, 2001
was set. The initial trial is limited to liability.
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 the Defendants' other facilities are covered in the
Complaint and NOV, the EPA has officially requested information concerning
activities at the Defendants' 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 is subject to various legal proceedings and claims, which
arise in the normal course of business. Further, in addition to certain
disclosures made previously herein, the Company assumed liability for various
claims, assessments and litigation in connection with its strategic
acquisitions. In the opinion of management, the amount of ultimate liability
with respect to these actions will not have a material adverse effect on the
financial position or results of operations of the Company.
Note 8 -- Regulatory Issues
Regulatory issues related to certain of Dynegy's operations,
principally its transmission and distribution segment, are subject to final
determination by various federal and state agencies. The most significant
regulation impacting Dynegy's operations results from laws, rules and
regulations promulgated by the State of Illinois through the Illinois Commerce
Commission ("ICC") and the Federal government through the Federal Energy
Regulatory Commission ("FERC"). As a result, these operations are subject to the
provisions of Financial Accounting Standard No. 71, "Accounting for the Effects
of Certain Types of Regulation," which recognizes the economic effects of
regulation. Contingent issues impacting the operations of these regulated
businesses and commitments associated therewith are summarized below.
Utility Earnings Cap. Illinois electric utility restructuring
legislation enacted in December 1997, P.A. 90-561, contains floor and ceiling
provisions applicable to Illinois Power's Return on Equity ("ROE") during a
transition period ending in 2006 (or 2008 at the option of the utility and with
approval by the ICC). Pursuant to these provisions, Illinois Power may request
an increase in its base rates if the two-year average of its earned ROE ("IP
ROE") is below the two-year average of the monthly average yields of 30-year
U.S. Treasury bonds for the concurrent period ("Treasury Yield"). Conversely,
Illinois Power is required to refund amounts to its customers equal to 50
percent of the value earned above a
Page 10 of 31
<PAGE>
DYNEGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Interim Periods Ended March 31, 2000 and 1999
defined "ceiling limit". The ceiling limit is exceeded if IP ROE exceeds the
Treasury Yield, plus 6.5% in 2000 through 2004 (which increases to 8.5% in 2000
through 2004 if a utility chooses not to implement transition charges after
2006). Regulatory asset amortization is included in the calculation of ROE for
the ceiling test, but is not included in the floor test calculation.
Rate Adjustment Provisions. P.A. 90-561 set residential customer base
electric rates beginning August 1, 1998, and reduces them an additional 5
percent effective on May 1, 2002. The impact on Illinois Power of the rate
directives is a revenue reduction of approximately $75 million in each of the
years 2000 and 2001, approximately $92 million in 2002, and approximately $101
million in 2003 and 2004, based on current consumption as compared to rates
expected prior to the legislation.
Direct Access Provisions. Beginning in October 1999, customers with
demand greater than 4 MW at a single site and customers with at least 10 sites
having aggregate total demand of at least 9.5 MW were free to choose their
electric generation suppliers ("direct access"). Direct access for remaining
non-residential customers occurs in two phases: customers representing one-third
of the remaining load in the non-residential class in October 1999 and customers
representing the entire remaining non-residential load on December 31, 2000.
Direct access will be available to all residential customers in May 2002.
Illinois Power remains obligated to serve all customers who continue to take
service from the utility at tariff rates and remains obligated to provide
delivery service to all customers at regulated rates. The transition charges
departing customers must pay to Illinois Power are not designed to hold the
utility completely harmless from resulting revenue loss because of the
mitigation factor described below.
Although the specified residential rate reductions and the
introduction of direct access will lead to lower electric service revenues, P.A.
90-561 is designed to protect the financial integrity of electric utilities in
three principal ways:
. Departing customers are obligated to pay transition charges, based on the
utility's lost revenue from that customer. The transition charges are
applicable through 2006 and can be extended two additional years by the ICC.
. Utilities are provided the opportunity to lower their financing and capital
costs through the issuance of "securitized" bonds, also called transitional
funding instruments; and
. The ROE of utilities is managed through application of floor and ceiling test
rules contained in P.A 90-561 described elsewhere herein.
The extent to which revenues are affected by P.A. 90-561 will depend
on a number of factors including future market prices for wholesale and retail
energy, and load growth and demand levels in the current Illinois Power service
territory.
ISO Participation. Participation in an ISO by utilities serving retail
customers in Illinois was one of the requirements included in P.A. 90-561. In
January 1998, Illinois Power, in conjunction with eight other transmission-
owning entities, filed with the FERC for all approvals necessary to create and
to implement the Midwest Independent Transmission System Operator, Inc.
("MISO"). On September 16, 1998, the FERC issued an order authorizing the
creation of a MISO. The goals of this joint undertaking are: 1) to put in place
a tariff allowing easy and nondiscriminatory access to transmission facilities
in a multi-state region, 2) to enhance regional reliability, and 3) to establish
an entity that operates independently of any transmission owner(s) or other
market participants. Since January 1998, five other transmission-owning entities
joined the MISO. The MISO has a stated goal to be fully operational by June 1,
2001. As a MISO member, Illinois Power provides guarantees of up to $10 million
to facilitate MISO access to bank lines of credit during the MISO startup phase.
Page 11 of 31
<PAGE>
Note 9 -- Segment Information
Dynegy's operations are divided into four reportable segments: Dynegy
Marketing & Trade ("DMT"), Dynegy Midstream Services ("DMS"), Dynegy Energy
Services ("DES") and Transmission and Distribution.
. Dynegy Marketing and Trade focuses on energy convergence - the marketing,
trading and arbitrage opportunities that exist among power, natural gas and
coal that can be enhanced by the control and optimization of related physical
assets.
. Dynegy's natural gas liquids subsidiary, Dynegy Midstream Services, includes
North American midstream liquids operations, global natural gas liquids
transportation and marketing operations.
. Dynegy Energy Services markets energy products and services to the retail
sector through direct marketing and strategic alliances with leading utility
companies
. Dynegy's transmission and distribution subsidiary, Illinois Power, is based in
Decatur, IL. It serves more than 650,000 natural gas and electric utility
customers in a 15,000-square-mile area across Illinois.
Operating segment information for the three-month periods ended March 31, 2000
and 1999 is presented below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
DYNEGY'S SEGMENT DATA FOR THE QUARTER ENDED MARCH 31, 2000
- -----------------------------------------------------------------------------------------------------------------------------
Transmission &
DMT DMS DES Distribution Elimination Total
----------- ---------- ------- -------------- ----------- -----------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic $2,698,211 $1,264,364 $16,705 $ 381,873 $ -- $ 4,361,153
Canadian 373,466 183,509 -- -- -- 556,975
Europe 431,139 -- -- -- -- 431,139
---------- ---------- ------- ---------- --------- -----------
3,502,816 1,447,873 16,705 381,873 -- 5,349,267
---------- ---------- ------- ---------- --------- -----------
Intersegment revenues:
Domestic 137,280 52,332 162 4,313 (194,087) --
Canadian 34,511 8,205 -- -- (42,716) --
Europe -- -- -- -- -- --
---------- ---------- ------- ---------- --------- -----------
171,791 60,537 162 4,313 (236,803) --
---------- ---------- ------- ---------- --------- -----------
Total revenues 3,674,607 1,508,410 16,867 386,186 (236,803) 5,349,267
---------- ---------- ------- ---------- --------- -----------
Operating margin 197,177 74,079 69 111,515 -- 382,840
Depreciation and amortization 27,580 45,354 227 37,754 -- 110,915
Interest expense (32,487) (6,278) (721) (34,628) -- (74,114)
Other income (expense) 43,234 (34,339) (37) (6,556) -- 2,302
Equity earnings (1,022) 6,274 7,550 -- -- 12,802
Income tax (provision) benefit (49,975) 11,302 (1,628) (4,753) -- (45,054)
Net income 74,810 (10,904) 2,129 2,971 -- 69,006
Identifiable assets:
Domestic $6,761,951 $1,897,570 $84,847 $3,422,569 $ -- $12,155,937
Canadian 327,927 121,210 -- -- -- 439,137
Europe 232,639 -- -- -- -- 232,639
Other 214,636 -- -- -- -- 214,636
Investment in unconsolidated affiliates 493,554 173,710 21,223 101 -- 688,588
Capital expenditures (172,086) (17,091) (2,538) (44,042) -- (235,757)
</TABLE>
Page 12 of 31
<PAGE>
DYNEGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Interim Periods Ended March 31, 2000 and 1999
DYNEGY'S SEGMENT DATA FOR THE QUARTER ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
DYNEGY'S SEGMENT DATA FOR THE QUARTER ENDED MARCH 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------
Transmission &
DMT DMS DES Distribution Elimination Total
----------- ---------- ------- -------------- ----------- -----------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic $1,630,795 $ 698,579 $ -- $ -- $ -- $2,329,374
Canadian 321,013 43,560 -- -- -- 364,573
Europe 351,026 -- -- -- -- 351,026
---------- ---------- ------- ---------- --------- ----------
2,302,834 742,139 -- -- -- 3,044,973
---------- ---------- ------- ---------- --------- ----------
Intersegment revenues:
Domestic 51,752 42,253 -- -- (94,005) --
Canadian 11,293 -- -- -- (11,293) --
Europe -- -- -- -- -- --
---------- ---------- ------- ---------- --------- ----------
63,045 42,253 -- -- (105,298) --
---------- ---------- ------- ---------- --------- ----------
Total revenues 2,365,879 784,392 -- -- (105,298) 3,044,973
---------- ---------- ------- ---------- --------- ----------
Operating margin 70,106 49,971 -- -- -- 120,077
Depreciation and amortization (8,561) (22,727) -- -- -- (31,288)
Interest expense (9,569) (9,665) -- -- -- (19,234)
Other income (expense) 10,653 (888) -- -- -- 9,765
Equity earnings 13,286 2,426 (649) -- -- 15,063
Income tax (provision) benefit (15,751) 2,912 227 -- -- (12,612)
Net income 26,920 1,573 (422) -- -- 28,071
Identifiable assets:
Domestic $2,840,733 $2,047,501 $10,443 $ -- $ -- $4,898,677
Canadian 253,927 42,458 -- -- -- 296,385
Europe 119,323 -- -- -- -- 119,232
Investment in unconsolidated affiliates 340,756 160,409 10,443 -- -- 511,608
Capital expenditures (80,431) (20,905) -- -- -- (101,336)
</TABLE>
Page 13 of 31
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Interim Periods Ended March 31, 2000 and 1999
The following discussion and analysis should be read in conjunction
with the unaudited condensed consolidated financial statements of Dynegy Inc.
included elsewhere herein and with the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
General
Company Profile. Dynegy is a leading provider of energy products and
services in North America, the United Kingdom and Europe. Products marketed by
the Company's wholesale operations include natural gas, electricity, coal,
natural gas liquids, crude oil, liquid petroleum gas and related services. The
Company's wholesale marketing operations are supported by ownership or control
of an extensive asset base and transportation network that includes unregulated
power generation, gas and liquids storage capacity, gas, power and liquids
transportation capacity and gas gathering, processing and fractionation assets.
The critical mass achieved through the combination of a large scale energy
marketing operation with strategically located assets, which augment the
marketing efforts, affords the Company the ability to offer innovative, value-
creating energy solutions to its customers.
From inception of operations in 1984 until 1990, the Company limited
its activities primarily to natural gas marketing. Starting in 1990, business
operations began expanding through acquisitions and strategic alliances
resulting in the formation of a mid-stream energy asset business and established
energy marketing operations in both Canada and the United Kingdom. The Company
initiated domestic electric power marketing operations in February 1994.
Effective March 1, 1995, the Company acquired Trident NGL Holding, Inc., a fully
integrated natural gas liquids company. On August 31, 1996, NGC completed a
strategic combination with Chevron whereby substantially all of Chevron's mid-
stream assets were acquired. Effective July 1, 1997, the Company acquired Destec
Energy, Inc., a leading independent power producer and developer. During 1998,
the Company changed its name to Dynegy Inc. in order to reflect its evolution
from a natural gas marketing company to an energy services company capable of
meeting the growing demands and diverse challenges of the dynamic energy market
of the 21st Century. In 1999, the Company initiated electric power marketing
operations in the United Kingdom and in Europe. On February 1, 2000, Dynegy
completed its acquisition of Illinova Corporation ("Illinova"), a holding
company owning unregulated fossil-fueled generation and regulated transmission
and distribution capabilities, strategically located in the upper mid-west
United States.
Business Segments. Dynegy's operations are divided into four
reportable segments: Dynegy Marketing & Trade ("DMT"), Dynegy Midstream Services
("DMS"), Dynegy Energy Services ("DES") and Transmission and Distribution.
. Dynegy Marketing and Trade focuses on energy convergence - the marketing,
trading and arbitrage opportunities that exist among power, natural gas and
coal that can be enhanced by the control and optimization of related physical
assets.
. Dynegy's natural gas liquids subsidiary, Dynegy Midstream Services, includes
North American midstream liquids operations, global natural gas liquids
transportation and marketing operations.
. Dynegy Energy Services markets energy products and services to the retail
sector through direct marketing and strategic alliances with leading utility
companies.
. Dynegy's transmission and distribution subsidiary, Illinois Power, is based in
Decatur, Ill. It serves more than 650,000 natural gas and electric utility
customers in a 15,000-square-mile area across Illinois.
Uncertainty of Forward-Looking Statements and Information. This Form
10-Q 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
Page 14 of 31
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Interim Periods Ended March 31, 2000 and 1999
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, forecasted or expected. Among the key risk
factors that may have a direct bearing on Dynegy's results of operations and
financial condition are:
. Competitive practices in the industries in which Dynegy competes;
. Fluctuations in commodity prices for natural gas, electricity, natural gas
liquids, crude oil or coal;
. Fluctuations in energy commodity prices which could not or have not been
properly hedged or that are inconsistent with Dynegy's open position in its
energy marketing activities;
. Operational and systems risks;
. Environmental liabilities which are not covered by indemnity or insurance;
. General economic and capital market conditions, including fluctuations in
interest rates;
. Foreign operations risk associated with the potential volatility of emerging
countries and fluctuations in foreign currency exchange rates; and
. The impact of current and future laws and governmental regulations
(particularly environmental regulations) affecting the energy industry in
general, and Dynegy's operations in particular.
Business Risk Management Assessment
Dynegy's operations and periodic returns are impacted by a myriad of
factors, some of which may not be mitigated by risk management methods. These
risks include, but are not limited to, commodity price, interest rate and
foreign exchange rate fluctuations, weather patterns, counterparty risk,
operational risks, environmental risks, management estimations, strategic
investment decisions, changes in competition and changes in regulation.
The Company is exposed to commodity price variability related to its
natural gas, natural gas liquids, 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:
. Manage and hedge its fixed-price purchase and sales commitments;
. Provide fixed-price commitments as a service to its customers and suppliers;
. Reduce its exposure to the volatility of cash market prices;
. Protect its investment in storage inventories; and
. Hedge fuel requirements at its gas processing and power generation facilities.
The Company may, at times, have a bias in the market, within
established guidelines, resulting from the management of its portfolio. In
addition, as a result of marketplace liquidity and other 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 certain liquids marketing
operations are accounted for under a mark-to-market accounting methodology. In
certain of these markets, long-term contract commitments may extend beyond the
Page 15 of 31
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Interim Periods Ended March 31, 2000 and 1999
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:
. changing weather patterns,
. unexpected delays in industry-wide construction of new capacity,
. unforeseen supply constraints or bottlenecks resulting from transmission
failures or other factors,
. unforeseen new technologies, and
. other similar factors.
Further, as Dynegy moves forward with the execution of its strategic
plan of capturing a 10 to 15 percent share of the wholesale power market, risk
of earnings volatility increases through exposure to unanticipated variability
in generation capacity dependability factors. As a result of supply contracts
routine in the industry, Dynegy's exposure relating to performance by these
generating assets resides not only with owned and controlled assets, but also
with third-party operated facilities. The volatility of earnings, whether it be
favorable or unfavorable, will likely be most profound during periods of peak
demand when, and if, regional industry-wide generation 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
improvements to meet certain statutory requirements or expenditures for
remediation of unanticipated environmental contamination. The potential
redirection of capital to these types of expenditures could reduce the level of
available discretionary capital currently expected to be used in executing
Dynegy's strategic plan in future periods.
Many of these risks are outside the control of Dynegy and may not be
fully mitigated through application of risk management methods and/or state-of-
the-art, first quartile operating methods.
Page 16 of 31
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Interim Periods Ended March 31, 2000 and 1999
Segment Price Fluctuation Exposures. DMT's integrated component
businesses include: 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 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 the cost of the
commodity fueling the facilities and electricity prices.
Operating margins associated with DMS' natural gas gathering,
processing and fractionation activities are very sensitive to changes in natural
gas liquids prices and the availability of inlet volumes. Commodity price
fluctuations may also affect the operating margins derived from the Company's
natural gas liquid marketing business. The impact from changes in natural gas
liquids prices on upstream operations results principally from the nature of
contractual terms under which natural gas is processed and products are sold. In
addition, certain processing plant assets are impacted by changes in, and the
relationship between, natural gas and natural gas liquids prices which, in turn
influences the volumes of gas processed. Based upon current levels of natural
gas processing activities and industry fundamentals, the estimated impact on
annual operating margins of each one-cent movement in the annual average price
of natural gas liquids approximates $6 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.
DES operating margins may be impacted by fixed-price commodity risk
imbedded in certain contractual arrangements entered into by the segment. Such
commodity price risk is managed, on a portfolio basis, with similar commodity
risks inherent in the operations of the other business segments.
Operating margins in the transmission and distribution businesses may
be impacted by commodity price fluctuations resulting from purchases of
electricity used in supplying service to its customers. Illinois Power has
contracted for volumes from various suppliers under contracts having various
commercial terms. Certain of these contracts do not obligate the supplier to
provide replacement power to Illinois Power in the event of a curtailment or
shutdown of operating facilities. Management believes that these arrangements
provide a significant, stable supply of electricity that will allow it to
effectively manage supply needs and reduce the risk of short-term supply
shortages during periods of peak demand. However, if the commodity volumes
supplied from these agreements are inadequate to cover Illinois Power's native
load, Illinois Power will be required to purchase its supply needs in open-
market purchases at prevailing market prices. Such
Page 17 of 31
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Interim Periods Ended March 31, 2000 and 1999
purchases would expose Illinois Power to commodity price risk. Price risk
associated with gas marketing operations of Illinois Power is mitigated through
contractual terms applicable to the business, as allowed by the ICC. Illinois
Power, through support from Dynegy, applies prudent risk-management practices in
order to minimize these market risks. Such risk-management practices may not
fully mitigate these exposures.
Seasonality. Dynegy's revenue and operating margin are subject to
fluctuations during the year, primarily due to the impact certain seasonal
factors have on sales volumes and the prices of natural gas, electricity and
natural gas liquids. Natural gas sales volumes and operating margin have
historically been higher in the winter months than in the summer months,
reflecting increased demand due to greater heating requirements and, typically,
higher natural gas prices. Conversely, power marketing operations are typically
impacted by higher demand and commodity price volatility during the summer
cooling season. Consistent with power marketing, the Company's electricity
generating facilities generally experience peak demand during the summer cooling
season, particularly for merchant plant generating facilities. Dynegy believes
that prospective seasonal fluctuations in demand and market prices for natural
gas will reduce over time as industry-wide gas-fired merchant generation
capacity expands in the United States. Revenue and operating margin in the
Transmission and Distribution businesses reflect a trend similar to DMT's
marketing operations reflecting higher seasonal gas sales in the winter and
higher seasonal electricity sales in the summer. DMS' businesses are also
subject to seasonal factors; however, such factors typically have a greater
impact on sales prices than on sales volumes. Natural gas liquids prices
typically increase during the winter season due to greater heating requirements.
The Company's wholesale propane business is seasonally weighted in terms of
volume and price, consistent with the trend in the Company's natural gas
operations, as a result of greater demand for crop-drying and space-heating
requirements in the fall and winter months.
Effect of Inflation. Although Dynegy's operations are affected by
general economic trends, management does not believe inflation has had a
material effect on the Company's results of operations.
Liquidity and Capital Resources
The Company's business strategy has historically focused on
acquisitions or construction of core operating facilities in order to capture
significant synergies existing among these types of assets and Dynegy's natural
gas, power and natural gas liquids marketing businesses. The Company's energy
convergence strategies are focused on marketing, trading and arbitrage
opportunities involving natural gas and power, centered around the control and
optimization of Btu conversion capacity within the wholesale gas and power
businesses (a.k.a., "Merchant Leverage Effect"). For the foreseeable future, the
Company's primary focus will be the acquisition and/or construction of merchant
power generating assets that will enable the Company to fully realize the
Merchant Leverage Effect of commercialization of these generating assets.
Dynegy has historically relied upon operating cash flow and borrowings
from a combination of commercial paper issuances, money market lines of credit,
corporate credit agreements and various public debt issuances for its liquidity
and capital resource requirements. At March 31, 2000, availability under various
credit agreements totaled $1.6 billion. Of this available liquidity, $854
million was restricted for use by Dynegy Inc., $410 million by Dynegy Holdings
Inc., $343 million was restricted for use by Illinova Holdings Inc. and $11
million was available for use under other bank facilities. Approximately $950
million of shelf availability remains under outstanding registration statements
consisting of $500 million at Dynegy Inc. and $450 million at Dynegy Holdings
Inc., which may be used for general corporate purposes. Management believes
additional financing arrangements can be obtained at reasonable terms, if
required.
Dynegy expended approximately $1.08 billion cash to acquire a pro rata
portion of the outstanding common stock of former Dynegy pursuant to the terms
of the Illinova merger. 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. On a long-term basis, Dynegy financed the
acquisition of Illinova through a combination of sales of common equity and non-
strategic assets and from cash flow derived from its operations.
Page 18 of 31
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Interim Periods Ended March 31, 2000 and 1999
In April 2000, Dynegy sold approximately 4.6 million primary shares of
common equity at $55.00 per share. The offering included approximately 3.3
million shares of Class A common stock sold to the public and approximately 1.3
million shares of Class B common stock sold to Chevron in a private transaction,
pursuant to Chevron's existing contractual right to maintain a defined level of
ownership interest in Dynegy. Total net proceeds to Dynegy as a result of these
transactions approximated $245.1 million. This amount was net of the
underwriting commissions and expenses of approximately $16.4 million. Proceeds
from the offering were used to reduce short-term indebtedness incurred in the
acquisition of Illinova.
Pursuant to part of its stated plan to finance the cash portion of the
Illinova merger, the Company has successfully disposed of non-strategic, under-
performing assets and certain qualifying facilities for aggregate net proceeds
of approximately $667 million. The proceeds from these sales were first used to
retire indebtedness incurred in the acquisition of Illinova and then redeployed
into new business ventures.
Dynegy assumed $2.3 billion of outstanding long-term indebtedness held
by the Illinova consolidated group as part of the Illinova merger. At January 1,
2000, aggregate maturities of all long-term indebtedness assumed in the merger
totaled ($ in millions): 2000 - $150.0; 2001 - $30.0; 2002 - $115.7; 2003 -
$190.0, and 2004 and beyond - $1,811.6. In a public offering effective March 15,
2000, Dynegy issued $300 million of 8.125% Senior Notes due March 15, 2005,
through one of its subsidiaries, Dynegy Holdings Inc. Total proceeds net of
underwriting costs were $296.7 million. Interest is payable on the Senior Notes
on March 15 and September 15 of each year, beginning September 15, 2000.
Proceeds were used to repay existing Illinois Power indebtedness.
Dynegy's consolidated capital structure at March 31, 2000, adjusted
for the pro forma effects of the primary common equity offering completed in
April 2000, reflects a debt to equity relationship that exceeds the historic
norm. Dynegy continues to review alternatives to re-constitute and strengthen
its balance sheet in order to provide sufficient liquidity required to execute
its business strategy. Management believes that the maintenance of investment
grade credit ratings at Dynegy Inc., Dynegy Holdings Inc. and at Illinois Power,
combined with a continued ready access to debt and equity capital at reasonable
rates and sufficient trade credit to operate its businesses efficiently are keys
to accomplishing this goal. However, management is unable to predict with
certainty when and whether the capital structure of Dynegy Inc. will return to
levels existing prior to the Illinova merger.
Other Matters
Illinova Acquisition. Dynegy completed its acquisition of Illinova on
February 1, 2000. In the combination, Dynegy shareholders, other than Chevron,
NOVA Gas Services (U.S.) Inc. ("NOVA") and BG Holdings, Inc., elected to
exchange each former 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 former Dynegy common stock, NOVA and the
parent of BG Holdings, Inc. each received a combination of cash, subject to
proration, and shares of Dynegy Series A Convertible Preferred Stock. Chevron
received shares of Dynegy Class B common stock in exchange for all of its shares
of former Dynegy common stock and Series A Participating 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.
Strategic eCommerce Investment. In April 2000, Dynegy invested $25
million for a minority interest in eSpeed, Inc. Technology employed by eSpeed
Inc. will serve as the platform for the development of at least four new
commodity-specific electronic spot and futures marketplaces in which the
marketing subsidiaries of Dynegy and other marketers, including Williams
Companies Inc., may participate. Products that could ultimately be traded
include natural gas, electricity, natural gas liquids, petrochemicals, crude oil
and bandwidth. eSpeed anticipates that an electronic marketplace for natural gas
and electricity
Page 19 of 31
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Interim Periods Ended March 31, 2000 and 1999
will be made available to market participants like Dynegy and Williams in the
third quarter, with the development of additional marketplaces by the end of
2000.
Capital Asset Program. The Company is engaged in a continuous capital
asset expansion program consistent with its business plan and energy convergence
strategies. The emphasis of this capital asset program is on the acquisition or
construction of strategically located power generation assets. Consistent with
this strategy and as a result of the long lead time required by industry
manufacturers, the Company has executed or is currently negotiating purchase
orders to acquire in excess of forty state-of-the-art gas-fired turbines,
representing a capital commitment of approximately $1.3 billion. Delivery of the
manufactured turbines is occurring ratably through 2003. Commitments under these
purchase orders are generally payable consistent with the delivery schedule. The
purchase orders include milestone requirements by the manufacturer and provide
Dynegy with the ability to cancel each discrete purchase order commitment in
exchange for a fee, which escalates over time. The capital asset program is
subject to periodic review and revision, and the actual number of projects and
aggregate cost for such projects will be dependent on various factors including
available capital resources, market conditions, legislative actions, load
growth, changes in materials, supplies and labor costs and the identification of
partners in order to spread investment risk.
European Investment. In April, the company announced plans to
participate in the construction and ownership of two gas-fired power generation
plants in Germany through a consortium composed of Dynegy (10.0 percent
interest), Marubeni Corporation (64.9 percent interest) and BAW Holding West
GmbH (25.1 percent interest). The two plants will have combined generating
capacity of 1,200 megawatts. A 400-megawatt facility will be built near
Dortmund, while an 800-megawatt facility will be constructed near Ahaus. Upon
completion in March 2003, the facilities will provide power primarily to
industrial customers and municipalities in the northwest region of Germany.
Dynegy, utilizing its experience in the U.S. and European energy markets, will
lead the development of the projects' commercial activities, including fuel
procurement and power sales.
Quantitative and Qualitative Market Risk Disclosures. The Company is
exposed to certain market risks inherent in the Company's financial instruments,
which arise from transactions entered into in the normal course of business. The
Company routinely enters into financial instrument contracts to hedge purchase
and sale commitments, fuel requirements and inventories in its natural gas,
natural gas liquids, crude oil, electricity and coal businesses in order to
minimize the risk of market fluctuations. Dynegy also monitors its exposure to
fluctuations in interest rates and foreign currency exchange rates and may
execute swaps, forward-exchange contracts or other financial instruments to
hedge and manage these exposures. The absolute notional contract amounts
associated with commodity risk-management, interest rate and forward exchange
contracts, respectively, were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------------------------------
(absolute notional amounts)
<S> <C> <C>
Natural Gas (Trillion Cubic Feet) 6.505 5.702
Electricity (Million Megawatt Hours) 215.642 42.949
Natural Gas Liquids (Million Barrels) 26.845 19.902
Crude Oil (Million Barrels) -- 35.554
Interest Rate Swaps (in thousands of US Dollars) $ -- $ 36,524
Weighted Average Fixed Interest Rate Paid on Swaps -- 8.210
U.K. Pound Sterling (in thousands of US Dollars) $ 70,625 $ 85,812
Average U.K. Pound Sterling Contract Rate (in US Dollars) $ 1.6236 $ 1.6191
Canadian Dollar (in thousands of US Dollars) $296,369 $288,898
Average Canadian Dollar Contract Rate (in US Dollars) $ 0.6850 $ 0.6775
</TABLE>
Page 20 of 31
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Interim Periods Ended March 31, 2000 and 1999
Dynegy measures entity-wide market risk in its financial trading and
risk-management portfolios using value at risk. The quantification of market
risk using value at risk provides a consistent measure of risk across diverse
energy markets and products with different risk factors to set the overall
corporate risk tolerance, determine risk targets, and position limits. The use
of this methodology requires a number of key assumptions including the selection
of a confidence level and the holding period to liquidation. Dynegy relies on
value at risk to determine the maximum potential reduction in the trading
portfolio value allowed within a given probability over a defined period.
Because of limitations to value at risk, Dynegy uses other means to monitor
market risk in the trading portfolios. In addition to value at risk, Dynegy
performs regular stress and scenario 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 March 31, 2000, the value at risk for Dynegy's trading and
risk-management portfolios approximated $10.2 million and the average of such
value during the three-month period ended March 31, 2000 was estimated at $6.4
million.
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.
Conclusion
The Company continues to believe that it will be able to meet all
foreseeable cash requirements, including working capital, capital expenditures
and debt service, from operating cash flow, supplemented by borrowings under its
various credit facilities and equity sales, if required.
Page 21 of 31
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Interim Periods Ended March 31, 2000 and 1999
Results of Operations
Provided below is a narrative and tabular presentation of certain
operating and financial data and statistics for the Company's businesses for the
three-month periods ended March 31, 2000 and 1999, respectively.
Three-Month Periods Ended March 31, 2000 and 1999
For the quarter ended March 31, 2000, Dynegy realized net income of
$69.0 million, or $0.45 per diluted share, compared with first quarter 1999 net
income of $28.1 million, or $0.25 per diluted share. Current period results
included the operations acquired in the Illinova merger beginning on from
January 1, 2000. Additionally, first quarter 2000 results included a non-
recurring after-tax gain on the sale of certain qualifying generation facilities
of $33.8 million and after-tax charges aggregating $44.2 million related to the
sale and impairment of certain natural gas liquids assets, the adjustment in the
carrying value of the domestic crude assets related to the anticipated sale of
the business and merger related costs. First quarter 1999 results included an
after-tax $5.8 million non-recurring gain on the sale of an investment.
Recurring net income for first quarter 2000 totaled $79.4 million, or $0.52 per
diluted share compared with recurring net income for first quarter 1999 of $22.3
million, or $0.20 per diluted share.
First quarter 2000 results were led by a strong performance in energy
convergence operations, particularly in U.S. power and gas and a significant
contribution from Dynegy's European business unit. This quarter's results also
reflect solid returns in Dynegy's natural gas liquids businesses, which
continued to benefit from higher product prices and lower expenses, and in the
transmission and distribution business of IP, where a strategic focus on
efficient operations continues to lower costs and improve service reliability.
Consolidated operating margin for the current quarter totaled $382.8 million
compared to $120.1 million for the same 1999 period, reflecting improved margins
in DMT and DMS operations and the additional earnings attributable to the newly
acquired Transmission and Distribution segment. DMT contributed $197.2 million
to first quarter 2000 consolidated operating margin compared to $70.1 million
reported in first quarter 1999, an increase of 181 percent. DMS contributed
$74.1 million in first quarter 2000 operating margin, a $24.1 million
improvement over the 1999 period. The Transmission and Distribution segment,
acquired in the Illinova acquisition, contributed $111.5 million to first
quarter 2000 operating margin.
Operating income increased $142.9 million quarter-to-quarter,
reflecting the significantly higher operating results from the convergence and
liquids businesses as well as the contribution of the operations acquired in the
Illinova merger. Improved operating results were partially offset by higher
depreciation and amortization and general and administrative expenses. Increases
in depreciation and amortization expense in the 2000 quarter reflect the impact
of the Illinova merger, the impairment of natural gas liquids processing assets,
continued expansion of the Company's asset base and operations, principally in
the convergence businesses, and enhanced information technology infrastructure.
The increased level of general and administrative expenses also reflects the
impact of the Illinova merger as well as incremental costs associated with a
larger, more diverse base of operations, non-capitalizable consulting and other
costs required to support technology infrastructure improvements and higher
variable compensation costs period-to-period.
Incremental to Dynegy's consolidated operating income was the
Company's equity share in the earnings of its unconsolidated affiliates, which
contributed approximately $12.8 million and $15.1 million to pre-tax quarterly
earnings in the 2000 and 1999 periods, respectively. Variances period-to-period
in these results reflect the impact of weather driven demand, changes in
commodity prices, particularly as these changes impacted DMS' investments, and
the sale of the qualifying facilities. The following table provides a summary of
equity earnings by investment for the comparable periods.
Page 22 of 31
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Interim Periods Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
EQUITY EARNINGS FROM UNCONSOLIDATED AFFILIATES
- -------------------------------------------------------------------------------
For the Three-Months Ended March 31,
----------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Dynegy Marketing & Trade:
Accord $ 3,750 $ 4,500
Power Generation Equity Investments
(in aggregate) (4,772) 8,620
Other, net -- 167
------- -------
(1,022) 13,287
------- -------
Dynegy Energy Services: 7,550 (649)
------- -------
Dynegy Midstream Services:
Gulf Coast Fractionators 701 870
West Texas LPG Pipeline Limited
Partnership 1,304 872
Venice Energy Services Company, L.L.C. 2,449 294
Other, net 1,820 389
------- -------
6,274 2,425
------- -------
$12,802 $15,063
======= =======
</TABLE>
Interest expense totaled $74.1 million for the quarter ended March 31,
2000, compared to $19.2 million for the equivalent 1999 period. The variance is
attributable to the increased indebtedness resulting from the acquisition of
Illinova, both in terms of Illinova indebtedness assumed in the transaction and
principal borrowed to effect the transaction. Additionally, interest rates on
variable rate borrowings was higher in the current period as a result of market
movements in such rates. Accumulated distributions associated with trust
preferred securities and preferred stock of wholly-owned subsidiaries totaled
$9.1 and $4.2 million for the quarter ended March 31, 2000 and 1999,
respectively. The increase in expense period-to-period reflects the assumption
of Illinova's outstanding obligations resulting from the merger.
Other income and expenses, net reflected a gain of $2.3 million in the
quarter ended March 31, 2000 compared with income of $9.8 million in the 1999
period. The 2000 quarter included a pre-tax gain on the sale of certain
qualifying generation facilities of $52.0 million and pre-tax charges
aggregating $43.0 million related to the sale of certain natural gas liquids
assets and merger related costs. The 1999 period included a pre-tax gain of
$8.9 million related to the sale of an investment. The remaining amounts
consisted of interest income, minority interests in consolidated subsidiaries
and certain other non-recurring income and expense items in both periods.
The Company reported an income tax provision of $45.1 million for the
three-month period ended March 31, 2000, compared to an income tax provision of
$12.6 million for the 1999 period. The effective rates approximated 39 and 31
percent in 2000 and 1999, respectively. The difference between the
aforementioned effective rate and the statutory rate of 35 percent for 2000
results primarily from state income taxes. The difference for the 1999 periods
results principally from permanent differences arising from the amortization of
certain intangibles and debt premiums, permanent differences from the effect of
certain foreign equity investments and state income taxes.
Page 23 of 31
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Interim Periods Ended March 31, 2000 and 1999
Segment Disclosures -
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
DYNEGY MARKETING & TRADE
- -------------------------------------------------------------------------------
Three Months Ended March 31,
----------------------------------------
2000 1999
------------------- -------------------
(in thousands)
<S> <C> <C>
Operating Margin:
Power Marketing and Generation $113,819 $ 37,432
Natural Gas Marketing 32,353 24,602
European Gas and Power Marketing 51,005 8,071
Equity Investments (1,022) 13,287
-------- --------
Subtotal-Financial Contribution 196,155 83,392
Depreciation (27,580) (8,561)
General and Administrative Expenses (51,256) (31,539)
Other Items 43,234 10,653
-------- --------
Earnings Before Interest and Taxes 160,553 53,945
Interest Expense (35,768) (11,274)
-------- --------
Pre-tax Earnings 124,785 42,671
Income Tax Provision 49,975 15,751
-------- --------
Net Income $ 74,810 $ 26,920
======== ========
Recurring Net Income(1) $ 48,001 $ 21,155
======== ========
Operating Statistics:
Natural Gas Marketing (Bcf/d) -
U.S. Sales Volumes 7.3 7.0
Canadian Sales Volumes 2.3 2.3
Europe Sales Volumes 2.0 1.6
-------- --------
11.6 10.9
======== ========
Power Generation (Million Megawatt Hours
Generated) -
Gross 6.9 3.6
Net 5.8 2.4
Electric Power Marketing - Million
Megawatt Hours 15.1 13.1
-------- --------
20.9 15.5
======== ========
</TABLE>
- ------------
1. Recurring net income consists of segment reported net income adjusted for
identified non-recurring items more fully described in the following text.
Dynegy Marketing & Trade reported recurring segment net income of
$48.0 million for the three-month period ended March 31, 2000, compared with
recurring net income of $21.2 million in the 1999 quarter. Included in first
quarter 2000 earnings is a non-recurring after-tax gain of $33.8 million
relating to the sale of certain qualifying facilities and an after-tax $7.0
million charge related to merger costs. Included in first quarter 1999 earnings
is a non-recurring after-tax gain of $5.8 million related to the sale of an
investment. Recurring results of operations period-to-period were influenced by:
. additional unregulated merchant generating acquired in the Illinova merger,
. increased domestic and European power origination, and
. improved returns from worldwide power and gas marketing and trading
operations, offset by
Page 24 of 31
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Interim Periods Ended March 31, 2000 and 1999
. increased depreciation and general and administrative expenses reflecting the
impact of the Illinova acquisition, higher variable compensation costs and
increased capital and overhead costs required to support the larger, more
diverse base of operations.
Total megawatt hours produced and sold during the 2000 quarter
aggregated 20.9 million megawatt hours compared to 15.5 million megawatt hours
during the 1999 period. The increase is a result of the additional megawatt
hours acquired in the Illinova acquisition and the increase in trading volumes
due to more favorable market conditions. Total natural gas volumes sold
increased to 11.6 billion cubic feet per day from 10.9 billion cubic feet per
day during last year's first quarter, principally as a result of increased
volumes sold to the retail alliances and to fuel gas-fired generation in the
U.S.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
DYNEGY MIDSTREAM SERVICES
- -------------------------------------------------------------------------------
Three Months Ended March 31,
----------------------------------------
2000 1999
------------------- -------------------
(in thousands)
<S> <C> <C>
Operating Margin:
Upstream Operations $ 32,368 $ 18,240
Downstream Operations 41,711 31,632
Equity Investments 6,274 2,425
-------- --------
Subtotal-Financial Contribution 80,353 52,397
Depreciation (45,354) (22,727)
General and Administrative Expenses (15,780) (18,003)
Other Items (34,339) (888)
-------- --------
Earnings (Loss) Before Interest
and Taxes (15,120) 10,779
Interest Expense (7,086) (12,118)
-------- --------
Pre-tax Earnings (Loss) (22,206) (1,339)
Income Tax Benefit (11,302) (2,912)
-------- --------
Net Income (Loss) $(10,904) $ 1,573
======== ========
Recurring Net Income(1) $ 24,177 $ 1,573
======== ========
Operating Statistics:
Natural Gas Liquids Processed
(MBbls/d - Gross) -
Field Plants 75.4 88.5
Straddle Plants 41.1 28.6
-------- --------
116.5 117.1
======== ========
Barrels Received for Fractionation (MBbls/d) 219.3 161.3
Natural Gas Liquids Sold 595.5 539.4
Average commodity Prices:
Henry Hub Natural Gas (First of Month) $ 2.53 $ 1.75
Crude Oil - Cushing 26.23 10.39
Average Mont Belvieu Price 0.53 0.23
</TABLE>
- ------------
1. Recurring net income consists of segment reported net income adjusted for
identified non-recurring items more fully described in the following text.
Page 25 of 31
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Interim Periods Ended March 31, 2000 and 1999
Dynegy Midstream Services reported recurring net income of $24.2
million in the first quarter of 2000 compared with recurring net income of $1.6
million in the same 1999 quarter. Included in first quarter 2000 earnings is an
aggregate non-recurring after-tax charge of $35.1 million relating to the sale
and impairment of certain assets and businesses and allocated merger costs. On a
pre-tax basis, $25 million of this charge is included in depreciation expense
and $29 million is included in other items. Recurring results of operations
period-to-period were influenced by:
. substantially improved natural gas liquids commodity prices,
. volatile commodity markets,
. on-time inventory management techniques,
. lower operating costs,
. an active hedging program in 2000,
. lower depreciation costs, and
. lower general and administrative and non-variable compensation expenses.
Aggregate domestic natural gas liquids processing volumes totaled
116.5 thousand gross barrels per day in 2000 compared to an average 117.1
thousand gross barrels per day during 1999. The net decrease in processing
volumes is a result of a decrease in field volumes resulting from the sale of
the Ark-La-Tex assets in fourth quarter 1999 and the mid-continent assets in
March 2000. Increases in straddle plant volumes, which reflect the improved
pricing relationship between natural gas and natural gas liquids period-to-
period, partially offset the lower field plant production in 2000. After
deducting the impact on 1999's first quarter production of volumes related to
the Ark-La-Tex and mid-continent assets, normalized processing volumes increased
14 percent in 2000. Fractionation volumes increased principally as a result of
the aforementioned improved relationship between natural gas and natural gas
liquids prices that induced increased straddle production period-to-period
resulting in greater volumes available for fractionation. Natural gas liquids
marketing volumes were higher period over period reflecting improved demand in
the chemicals and wholesale markets.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
DYNEGY ENERGY SERVICES
- -------------------------------------------------------------------------------
Three Months Ended March 31,
----------------------------------------
2000 1999
------------------- -------------------
(in thousands)
<S> <C> <C>
Retail Operating Margin $ 69 $ --
Equity Investments 7,550 (649)
------- -----
Subtotal-Financial Contribution 7,619 (649)
Depreciation (227) --
General and Administrative Expenses (2,808) --
Other Items (37) --
------- -----
Earnings (Loss) Before Interest
and Taxes 4,547 (649)
Interest Expense (790) --
------- -----
Pre-tax Earnings (Loss) 3,757 (649)
Income Tax Provision Benefit 1,628 (227)
------- -----
Net Income (Loss) $ 2,129 $(422)
======= =====
Recurring Net Income (Loss)(1) $ 2,316 $(422)
======= =====
</TABLE>
- ------------
1. Recurring net income consists of segment reported net income adjusted for
identified non-recurring items more fully described in the following text.
Page 26 of 31
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Interim Periods Ended March 31, 2000 and 1999
Dynegy Energy Services reported recurring net income of $2.3 million,
compared with a recurring net loss of $422,000 in the 1999 period. Improved
earnings reflect positive results in the quarter related to the segment's
interests in its mid-west and southeast retail alliances. This segment was
formed effective with the acquisition of Illinova and is engaged in the
marketing of retail energy products and services through direct marketing and
strategic alliances with regional market leaders. Dynegy's goal is to form a
North American network of regional retail energy alliances while building upon
Illinova's retail operations, which included three distinct strategies:
commercial & industrial and retail commodity sales and services; non-commodity
energy related products and services; and, energy information software products.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
TRANSMISSION AND DISTRIBUTION
- -------------------------------------------------------------------------------
Three Months Ended March 31,
----------------------------------------
2000 1999
------------------- -------------------
(in thousands)
<S> <C> <C>
Operating Margin $111,515 $ --
Depreciation (37,754) --
General and Administrative Expenses (19,937) --
Other Items (6,556) --
-------- --------
Earnings (Loss) Before Interest
and Taxes 47,268 --
Interest Expense (39,544) --
-------- --------
Pre-tax Earnings (Loss) 7,724 --
Income Tax Benefit 4,753 --
-------- --------
Net Income (Loss) $ 2,971 $ --
======== ========
Recurring Net Income(1) $ 4,906 $ --
======== ========
Operating Statistics:
Electric Sales in KWH (Millions) -
Residential 1,236.0 --
Commercial 1,041.0 --
Industrial 2,098.0 --
Other 92.0 --
-------- --------
Sales to Ultimate Customers 4,467.0 --
Interchange 47.0 --
-------- --------
Total Electric Sales 4,514.0 --
======== ========
Gas Sales in Therms (Millions) -
Residential 145.0 --
Commercial 61.0 --
Industrial 24.0 --
-------- --------
Sales to Ultimate Customers 230.0 --
Transportation of Customer-Owned Gas 75.0 --
Interdepartmental Sales 60.0 --
-------- --------
Total Gas Sales 311.0 --
======== ========
</TABLE>
- ------------
1. Recurring net income consists of segment reported net income adjusted for
identified non-recurring items more fully described in the following text.
Page 27 of 31
<PAGE>
DYNEGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Interim Periods Ended March 31, 2000 and 1999
The Transmission and Distribution segment, acquired in the Illinova
acquisition, reported recurring net income of $4.9 million for the first quarter
2000, which amount included a $1.9 million after-tax non-recurring merger cost
charge. This segment includes Illinois Power, Dynegy's regulated transmission
and distribution subsidiary, engaged in the transmission, distribution and sale
of electricity and natural gas to approximately 650,000 customers across a
15,000 square-mile area of Illinois.
Operating Cash Flow
Cash flow from operating activities totaled $142.2 million for the
three-month period ended March 31, 2000, compared to a use of cash of $(11.8)
million reported in the same 1999 period. Changes in operating cash flow reflect
the operating results previously discussed herein and changes in working
capital, particularly investment in discretionary inventory volumes period-to-
period. Changes in other working capital accounts, which include trade
receivables and payables prepayments, other current assets and accrued
liabilities, reflect expenditures or recognition of liabilities for settlements
of certain litigation, insurance costs, certain deposits, salaries, taxes other
than on income, certain deferred revenue accounts and other similar items.
Fluctuations in these accounts, period-to-period, reflect changes in the timing
of payments or recognition of liabilities and are not directly impacted by
seasonal factors.
Capital Expenditures and Investing Activities
Investing activities in the 2000 quarter included the aforementioned
acquisition of Illinova and a net $235.8 million expended principally on
construction of power generation assets, maintenance capital related to the
transmission and distribution segment and investment associated with technology
infrastructure. Dynegy financed the cash component of the Illinova acquisition
initially with borrowings under a debt facility and commercial paper and the
issuance of $200 million of Class B common stock to Chevron. On a long-term
basis, Dynegy financed the acquisition of Illinova through a combination of
sales of common equity and non-strategic assets and from cash flow derived from
its operations. The Company received cash inflows of approximately $667 million
in the first quarter 2000 principally related to the sale of certain qualifying
facilities and liquids assets. These cash inflows were used primarily to retire
indebtedness resulting from the acquisition. During the three-months ended March
31, 1999, the Company spent $140.3 million, principally on the acquisition of
power generating assets, maintenance capital improvements at existing facilities
and capital investment associated with technology infrastructure. Additionally,
during the 1999 period, the Company received proceeds of $16.7 million
principally related to the sale of an investment.
Financing Activities
As an integral part of the Illinova acquisition, Chevron purchased
shares of Class B Common Stock for $200 million. Proceeds from this sale were
used to partially finance the cash portion of the merger.
Dividend Requirements
Dynegy declares quarterly dividends on its outstanding common stock at
the discretion of its Board of Directors. Effective the date of the merger, the
holders of Class A and Class B common stock are entitled to receive dividends
for 2000 of $0.60 per share if, when and as declared by the Board of Directors
of the Company out of funds legally available therefor. The holders of Class B
common stock have certain conversion features and maintain certain preemptive
rights under the shareholder agreement. The holders of Series A Convertible
Preferred Stock are entitled to receive dividends of $3.00 per share annually
if, when and as 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 carries certain priority,
liquidation, redemption, conversion and voting rights not available to the
common shareholders. The Company paid approximately $9.5 million in cash
dividends and distributions during the three-month period ended March 31, 2000
and $2.0 million during the three-month period ended March 31, 1999.
Page 28 of 31
<PAGE>
DYNEGY INC.
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
On August 3, 1998, Modesto Irrigation District ("MID") filed a lawsuit
against PG&E and Destec Energy, Inc. ("Destec") in federal court for the
Northern District of California, San Francisco division. The lawsuit alleges
violation of federal and state antitrust laws and breach of contract against
Destec. 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
breach of contract and tortious interference with prospective economic relations
claims against Destec and tortious interference with contract and tortious
interference with prospective economic relations claims against PG&E. Motions to
dismiss MID's state court claims were heard by the state court and by order
dated April 6, 2000, MID was directed to amend its complaint. MID filed its
amended complaint on April 20, 2000, including Dynegy as a defendant. Dynegy
plans to file a motion to dismiss MID's amended complaint against Dynegy. 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, which was approved by the District Court
on April 20, 2000. The order approving the settlement also contains a bar
against any claim for contribution that might otherwise be asserted by Dow
against DPC. The settlement dismisses AES's suit against DPC with prejudice. The
settlement had no impact on Dynegy's results of operations or financial
position.
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. Subsequently, the DOJ and EPA amended the NOV and Complaint to
include Illinova Power Marketing, Inc. (now known as Dynegy Midwest Generation,
Inc. ("DMG")) (Illinois Power and DMG collectively the "Defendants"). 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 the
Defendants" 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. The Defendants
filed an answer denying all claims and asserting various specific defenses. By
order dated April 19, 2000, a trial date of November, 2001 was set. The initial
trial is limited to liability.
Page 29 of 31
<PAGE>
DYNEGY INC.
PART II. OTHER INFORMATION
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 the Defendants' other facilities are covered in the
Complaint and NOV, the EPA has officially requested information concerning
activities at the Defendants' 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 is subject to various legal proceedings and claims, which
arise in the normal course of business. Further, in addition to certain
disclosures made previously herein, the Company assumed liability for various
claims, assessments and litigation in connection with its strategic
acquisitions. In the opinion of management, the amount of ultimate liability
with respect to these actions will not have a material adverse effect on the
financial position or results of operations of the Company.
Item 6 - Exhibits and Reports on Form 8-K
(a) The following instruments and documents are included as exhibits to this
Form 10-Q.
Exhibit Number Description
-------------- -----------
+10.1 Dynegy Inc. Deferred Compensation Plan for Certain
Directors
+10.2 Employment Agreement effective February 1, 2000 between
Matthew K. Schatzman and Dynegy
(b) Current Report on Form 8-K, Commission File No. 1-11156, dated January 6,
2000, relating to the premature announcement of the Dynegy/Illinova Merger
closing by the New York Times.
Current Report on Form 8-K, Commission File No. 1-11156, dated February 2,
2000, relating to the closing of the Dynegy/Illinova Merger.
Current Report on Form 8-K, Commission File No. 1-11156, dated February 29,
2000, relating to the filing of Dynegy/Illinova pro forma financial
information.
Current Report on Form 8-K, Commission File No. 1-11156, dated March 17,
2000, relating to the filing of Illinova Corporation audited financial
statements and Dynegy/Illinova pro forma financial information.
Page 30 of 31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned and thereunto duly authorized.
DYNEGY INC.
Date: May 15, 2000 By: /s/ Bradley P. Farnsworth
-----------------------------
Bradley P. Farnsworth, Senior
Vice President and Controller
(Principal Accounting Officer)
Page 31 of 31
<PAGE>
EXHIBIT 10.1
DYNEGY INC.
DEFERRED COMPENSATION PLAN FOR CERTAIN DIRECTORS
1. Participants. Any director of the Company, other than a director who is
also a salaried officer or employee of the Company or any of its subsidiaries,
may elect to become a participant ("Participant") under this Plan by written
notice to the Company.
2. Deferred Retainer and Fees. Any Participant may defer all or any portion
of his or her retainer and fees as a director which are earned for the ensuing
years of every service after the date of said election as he or she may specify
in said written notice to the Company, and such compensation so deferred shall
be paid only as hereinafter provided. Any Participant may suspend future
deferments with respect to fees and retainers earned for ensuing years of
service after the date of suspension as he or she may specify by written notice
to the Company. Following any such suspension, a director may make a new
election to again become a Participant. No Participant may make such a change
more than once in any twelve-month period or again become a Participant within
twelve months after the date of suspension. The election to defer for any year
shall be irrevocable and the retainer and fees for all of such year shall be
deferred until distribution in accordance with the terms of the Plan. For
purposes of this Plan, a year of service shall begin on the date of an election
of a director and on the date immediately before the next annual meeting of
shareholders of the Company.
3. Method of Deferral and Distribution.
(a) For each Participant electing to participate in the Plan, the
Company shall maintain a deferred money account ("Deferred Money
Account") which shall periodically be converted into a stock unit
account ("Stock Unit Account") for each such Participant. Each
Participant will be furnished annually with a statement of his
account.
(b) Deferred retainers and fees of each Participant shall be credited
as a dollar amount to the Participant's Deferred Money Account on
the date they otherwise would be payable and converted into stock
units quarterly at March 31, June 30, September 30 and December 31
in each year by dividing the dollar balance of such Deferred Money
Account as of the end of each such quarter by the last reported
sales price per share of the Company's Class A Common Stock ("Common
Stock") on the New York Stock Exchange Composite Tape on the last
day upon which such stock was traded during each such quarter. The
number of stock units for full shares so determined shall be
credited to the Participant's Stock Unit Account and the aggregate
value thereof at said closing price shall be charged to the
Participant's Deferred Money Account. Any cash balance remaining in
the Participant's Deferred Money Account after such charge shall be
used together with other subsequent credits thereto at the next
stock conversion period.
<PAGE>
(c) Additional credits will be made to each Participant's Deferred
Money Account in dollar amounts equal to the cash dividends (or the
fair market value of dividends paid in property). In the case of a
stock dividend or stock split, additional credits will be made to
each Participant's Stock Unit Account of the number of stock units
equal to the number of full shares of the Company's Common Stock
that such Participant would have received from the time to time he
or she had been the owner on the record dates with respect thereto
of the number of shares of the Company's Common Stock equal to the
number of stock units in his or her Stock Unit Account in such
dates.
3. Distribution.
(a) Upon termination of a Participant's services as a director;
(i) payment of the balance in his or her Deferred Money
Account, if any, remaining either after the conversion dates
occurring in the calendar year of his or her termination but
after his or her date of termination shall be made to the
Participant in cash, and;
(ii) payment of the balance in his or her Stock Unit Account
shall be made to the Participant in shares of Common Stock of
the Company;
in such number of annual installments as shall be determined by the Company in
its sole discretion, subject to the additional credits provided in paragraph
4(b). The Company may counsel with Participant's prior to such determination.
Each annual distribution shall be made as of January 31, beginning the January
31, following the termination of Participant's services as a director.
(a) The Stock Unit Account of a terminated Participant in this Plan,
until complete distribution of such Account in whole shares of
Common Stock of the Company shall be credited with additional
credits in accordance with paragraph 3(c) above which such
additional credits to the extent of the equivalent of whole shares
of Common Stock of the Company shall be distributed in shares in
the next annual installment. Any dollar amounts remaining which do
not equal a whole share of Common Stock at the time of the last
distribution installment of Common Stock shall be paid in cash to
the Participant at the time of such distribution.
(b) If such Participant shall cease to be a director by reason of
his or her death or if he or she shall die after he or she shall be
entitled to distributions hereunder out prior to receipt of all
distributions hereunder,
<PAGE>
all cash or Common Stock then distributable hereunder shall be
distributed to such beneficiary as such Participant shall designate
by an instrument in writing filed with the Company, or in the
absence of such designation, to his or her personal representative,
or if none is appointed within six months of his or her death to his
or her spouse, or if not then living, to his or her then living
descendants, per stirpes, in the same manner and at the same
intervals as they would have been made to such Participant had he or
she continued to live.
5. Participant's Rights Unsecured. The right of any Participant to receive
a distribution hereunder in Common Stock of the Company or in cash shall be an
unsecured claim against the general assets of the Company. The deferred
retainers and fees may not be encumbered or assigned by the Participant. The
Company may, but shall not be obligated, to acquire shares of its outstanding
Common Stock from time to time in anticipation of its obligation to make such
distributions under the Plan, but no Participant shall have any rights in or
against any shares of Common Stock so acquired or in any cash held in his or her
Deferred Money Account. All such Common Stock and cash shall constitute general
assets for the Company and may be disposed of by the Company at such time and
for such purposes as it may deem appropriate.
6. Amendments to the Plan. The Board of Directors of the Company may amend
the Plan at any time, without the consent of the Participant or other
beneficiaries, provided, however, that no amendment shall divest any Participant
or beneficiary of rights to which he or she would have been entitled if the Plan
had been terminated on the effective date of such amendment.
7. Termination of the Plan. The Board of Directors of the Company may
terminate the Plan at any time. Upon termination of the Plan, distributions in
respect of credits to a Participant's Account as of the date of the date of
termination shall be made in the manner and at the time heretofore prescribed.
8. Expenses. Costs of administration of the Plan will be paid by the
Company.
<PAGE>
EXHIBIT 10.2
December 10, 1999
Mr. Matthew K. Schatzman
3902 Amherst Street
Houston, TX 77005
Dear Matt:
Set forth below are the terms of your employment (the "Agreement")
with Dynegy Inc. (hereinafter referred to collectively as "Dynegy" or the
"Company").
1. TITLE AND DUTIES
Your title shall be Division President, Energy Trading. You shall have
such 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.
2. TERM
(a) Unless earlier terminated as provided for herein, the term of this
Agreement will be for five (5) years, beginning on the Effective Date and ending
on the fifth 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 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 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.
<PAGE>
Matthew K. Schatzman
December 10, 1999
Page 2
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 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 felony criminal proceeding; (iv) drug or alcohol abuse; (v)
continued failure to perform your duties under this Agreement which is not cured
within 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 present value, as determined by
the Board of Directors in its sole and absolute discretion, of the benefits to
be provided to you in Paragraph 3(e) 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 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 resignation due to
such constructive discharge or discharge due not for cause, 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
Paragraph 3(e) is reduced; (ii) a significant diminution in your
responsibilities, authority or scope of duties is effected, 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
<PAGE>
Matthew K. Schatzman
December 10, 1999
Page 3
assertion of a constructive termination shall be communicated by delivery to the
Board of Directors of the Company 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
(30) day period, such resignation shall take effect upon the expiration of
thirty days from the date of the delivery of such notice. Any other resignation
by you shall be communicated by thirty days' advance written notice.
If you die, or become disabled and cannot perform your duties, your
employment hereunder shall be terminated 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 period of twelve (12) months
following the date of death or disability; (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. 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).
(d) 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 your termination.
3. COMPENSATION
(a) Each year during the Term hereof, you will be paid a base salary of
$400,000 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. 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
<PAGE>
Matthew K. Schatzman
December 10, 1999
Page 4
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 closing of the proposed merger of Dynegy and Illinova
Corporation pursuant to that certain merger agreement dated as of June 14, 1999,
as amended, (the "Dynegy/Illinova merger"), you will receive (x) stock option
grants pursuant to the Company's Long-Term Incentive Plan ("LTIP") with a value
equal to 150% 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 $500,000. 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 due execution and delivery of this Agreement by the
parties hereto, any EEOP or other options granted to you prior to November 1,
1999 shall become vested as of the date of closing of the Dynegy/Illinova
merger.
(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. In addition, the Company may provide
other perquisites as approved by the Dynegy Board of Directors, in its sole
discretion. Pursuant to the terms of Dynegy's vacation policy you will be
entitled to four (4) weeks per year of paid vacation.
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"
<PAGE>
Matthew K. Schatzman
December 10, 1999
Page 5
(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) above (e.g. in the event of
a termination pursuant to the first paragraph of Paragraph 2(c), the non-compete
obligations imposed by this Paragraph 4(c) 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 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 affiliates own production as described in clause
(ii) of this Paragraph 4(c)), or (iv) an integrated regulated electric and/or
<PAGE>
Matthew K. Schatzman
December 10, 1999
Page 6
gas utility, as long as the utility does not engage in the unregulated marketing
of its generation or power trading other than that related to the generation and
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 any time during the term of
this Agreement shall have been 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. 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
<PAGE>
Matthew K. Schatzman
December 10, 1999
Page 7
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 adjusted only by arbitration in accordance
with the rules of the American Arbitration Association, and judgment upon such
award rendered by the arbitrator may be entered in any court having jurisdiction
thereof. The arbitration shall be held in the city of 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
shall cause this Agreement
<PAGE>
Matthew K. Schatzman
December 10, 1999
Page 8
to be assumed by 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).
(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. 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:
Matthew K. Schatzman Dynegy Inc.
3902 Amherst Street 1000 Louisiana, Suite 5800
Houston, TX 77005 Houston, TX 77002
Attn: President
(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
<PAGE>
Matthew K. Schatzman
December 10, 1999
Page 9
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, 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.
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: Stephen W. Bergstrom
Title: President
<PAGE>
Matthew K. Schatzman
December 10, 1999
Page 10
AGREED AND ACCEPTED this
day of December, 1999
- -----
- ------------------------------
Matthew K. Schatzman
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