-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Itrkwv/ld4U2WD3ky8IC0UqV8H4J0wE5yNQ1IA09J4jOVQsQkN1OR+ACkRZKpHT/ vmNXFf25bKZWRwttoO9OoQ== 0000899243-99-000586.txt : 19990331 0000899243-99-000586.hdr.sgml : 19990331 ACCESSION NUMBER: 0000899243-99-000586 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNEGY INC CENTRAL INDEX KEY: 0000879215 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 943248415 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-68842 FILM NUMBER: 99576999 BUSINESS ADDRESS: STREET 1: 1000 LOUISIANA STREET 2: STE 5800 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7133677600 MAIL ADDRESS: STREET 1: 13430 NORTHWEST FREEWAY STREET 2: SUITE 1200 CITY: HOUSTON STATE: TX ZIP: 77040-6095 FORMER COMPANY: FORMER CONFORMED NAME: TRIDENT NGL HOLDING INC DATE OF NAME CHANGE: 19930916 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _____________ COMMISSION FILE NUMBER: 1-11156 DYNEGY INC. (Exact name of registrant as specified in its charter) Delaware 94-3248415 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1000 Louisiana, Suite 5800 Houston, Texas 77002 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 507-6400 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class: on which registered: Common Stock, par value $.01 per share New York Stock Exchange Series A Participating Preferred Stock -- 6.75% Debt Securities due 2005 -- 7.125% Debentures due 2018 -- 7.625% Senior Notes due 2026 -- Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes [X] No [_] The aggregate value of Common Stock held by non-affiliates of the registrant was approximately $434,709,735 on March 24, 1999, (based on $15.00 per share, the last sale price of the Common Stock as reported on the New York Stock Exchange Composite Tape on such date). 152,599,134 shares of the registrant's Common Stock were outstanding as of March 24, 1999. DOCUMENTS INCORPORATED BY REFERENCE. Portions of Parts I, II and IV in the Annual Report to Shareholders for the fiscal year ended December 31, 1998. As to Part III (items 10, 11, 12 and 13), Notice and Proxy Statement for the 1999 Annual Meeting of Stockholders to be filed not later than 120 days after December 31, 1998. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] DYNEGY INC. FORM 10-K TABLE OF CONTENTS Page PART I Item 1. Business........................................... 1 Item 1A. Executive Officers................................. 13 Item 2. Properties......................................... 15 Item 3. Legal Proceedings.................................. 20 Item 4. Submission of Matters to a Vote of Security Holders 22 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................ 22 Item 6. Selected Financial Data............................. 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 24 Item 8. Financial Statements and Supplementary Data......... 39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 39 PART III Item 10. Directors and Executive Officers of the Registrant. 39 Item 11. Executive Compensation............................. 39 Item 12. Security Ownership of Certain Beneficial Owners and Management........................................ 39 Item 13. Certain Relationships and Related Transactions..... 39 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................ 39 Signatures........................................................ 46 For definitions of certain terms used herein, see "Item 1. BUSINESS -- DEFINITIONS." PART I Item 1. BUSINESS THE COMPANY General Dynegy Inc. ("Dynegy" or the "Company") is a leading provider of energy products and services in North America and the United Kingdom. Products marketed by the Company's wholesale marketing operations include natural gas, electricity, coal, natural gas liquids, crude oil, liquid petroleum gas and related services. The Company's wholesale marketing operations are supported by ownership or control of an extensive asset base and transportation network that includes unregulated power generation, gas and liquids storage capacity, gas, power and liquids transportation capacity and gas gathering, processing and fractionation assets. The critical mass achieved through the combination of a large scale energy marketing operation with strategically located assets which augment the marketing efforts affords the Company the ability to offer innovative, value-creating energy solutions to its customers. The Company is a holding company that conducts substantially all of its business through its subsidiaries. From inception of operations in 1984 until 1990, Natural Gas Clearinghouse ("Clearinghouse") limited its activities primarily to natural gas marketing. Starting in 1990, Clearinghouse began expanding its core business operations through acquisitions and strategic alliances resulting in the formation of a mid-stream energy asset business and establishing energy marketing operations in both Canada and the United Kingdom. The Company initiated electric power marketing operations in February 1994 in order to exploit opportunities created by the deregulation of the domestic electric power industry. Effective March 1, 1995, Clearinghouse and Trident NGL Holding, Inc. ("Holding"), a fully integrated natural gas liquids company, merged ("Trident Combination") and the combined entity was renamed NGC Corporation ("NGC"). On August 31, 1996, NGC completed a strategic combination with Chevron U.S.A. Inc. and certain Chevron affiliates (collectively "Chevron") whereby substantially all of Chevron's mid-stream assets merged with NGC ("Chevron Combination"). BG plc, Chevron and NOVA Chemicals Corp. ("NOVA") each own approximately 26 percent of the outstanding common stock of Dynegy. Effective July 1, 1997, NGC acquired Destec Energy, Inc. ("Destec Acquisition"), a leading independent power producer. During 1998, the Company changed its name to Dynegy Inc. in order to reflect its evolution from a natural gas marketing company to an energy services company capable of meeting the growing demands and diverse challenges of the dynamic energy market of the 21st Century. The principal executive office of the Company is located at 1000 Louisiana, Suite 5800, Houston, Texas 77002, and the telephone number of that office is (713) 507-6400. Dynegy and its affiliates maintain marketing and/or regional offices in Atlanta, Georgia; Boston, Massachusetts; Calgary, Alberta; Chicago, Illinois; Dallas, Texas; Englewood, Colorado; London, England; Midland, Texas; Oklahoma City, Oklahoma; Pleasanton, California; Tampa, Florida; Tulsa, Oklahoma; and Washington D.C. UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION This Form 10-K contains various forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and information that are based on management's beliefs as well as assumptions made by and information currently available to management. When used in this document, words such as "anticipate", "estimate", "project", and "expect" reflect forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable; it can give no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected. Among the key risk factors that may have a direct bearing on Dynegy's results of operations and financial condition are: . Competitive practices in the industries in which Dynegy competes; . Fluctuations in commodity prices for natural gas, electricity, natural gas liquids, crude oil or coal; . Fluctuations in energy commodity prices which could not or have not been properly hedged or which are inconsistent with Dynegy's open position in its energy marketing activities; . Operational and systems risks; . Environmental liabilities which are not covered by indemnity or insurance; . Software, hardware or third-party failures resulting from Year 2000 issues; 1 . General economic and capital market conditions, including fluctuations in interest rates; and . The impact of current and future laws and governmental regulations (particularly environmental regulations) affecting the energy industry in general, and Dynegy's operations in particular. DEFINITIONS As used in this Form 10-K, the abbreviations listed below are defined as follows: Bbl 42 U.S. gallons, the basic unit for measuring crude oil and natural gas condensate. MBbls/d Volume of one thousand barrels per day. MMBbls Volume of one million barrels. MMcf/d Volume of one million cubic feet per day. Bcf Volume of one billion cubic feet. Bcf/d Volume of one billion cubic feet per day. Btu British Thermal Unit - a measure of the amount of heat required to raise the temperature of one pound of water one degree Fahrenheit. Bpd Barrels per day. NGLs Natural gas liquids. LPG Liquid petroleum gas. MW Megawatts. Spot The Henry Hub cash price posting for natural gas per the "Inside FERC" publication. BUSINESS The Company reports operations under two primary business segments: the Wholesale Gas and Power and Liquids segments. A general description of the business strategy employed by each segment is followed by a discussion of each segment's component businesses. WHOLESALE GAS AND POWER SEGMENT This segment is actively engaged in value creation through marketing and trading of natural gas, power and coal and the generation of electricity principally under the name Dynegy Marketing and Trade. Dynegy is pursuing an integrated wholesale energy business approach based on execution of an energy convergence strategy. This strategy exploits the marketing, trading and arbitrage opportunities existing in the natural gas and power markets that are enhanced by the control and optimization of related physical assets. The combination of a portfolio of strategic generation assets and a national gas and power marketing franchise allow for extraction of value resulting from arbitrage opportunities occurring across energy products, across geographic regions and over time. The Company refers to this synergistic relationship between merchant generation capacity and energy trading and marketing as the "Merchant Leverage Effect" depicted below. DYNEGY'S MERCHANT LEVERAGE EFFECT GENERATION TRADING & MARKETING Capacity & Energy National Market Access Expanded Product Portfolio Market Infrastructure & Intelligence Supply Reliability Risk Management & Arbitrage Development Expertise Fuel and Asset Management Operations Expertise Transmission Expertise & Position MARKET SHARE INCREASED RETURNS 2 Dynegy views its gas and power marketing and power generation businesses as an integrated unit. Ownership or control of merchant generation, or "Btu Conversion" capacity, when coupled with the Company's national wholesale gas and power marketing franchise, creates a wide range of value creation opportunities benefiting both the Company and its customers. Dynegy's wholesale trading and marketing franchise adds value to its generation assets by providing national market access, market infrastructure and intelligence, risk management and arbitrage opportunities, fuel management and procurement expertise and transmission expertise for inputs (gas) and outputs (power). Generation capacity adds value to the Company's wholesale trading and marketing franchise by providing an outlet/market for gas supply, a source of reliable power supply and an enhanced ability to structure innovative new products and services for customers. Concurrent with the restructuring of the U.S. wholesale electricity markets, Dynegy is continuing its focus on building a portfolio of merchant generation capacity in select markets across the country. Dynegy believes that merchant generation capacity, which is designed principally to supply power to markets during periods of peak demand, offers the greatest flexibility in executing its strategy of an integrated gas and power marketing and power generation business. For the foreseeable future, Dynegy will continue to expand its ownership or commercial control over strategic generation assets/capacity in selected markets through acquisitions, greenfield development and asset management agreements. It is expected that approximately seventy percent of projected capital expenditures over the next three years will be directed to the control or ownership of generation assets designed to maximize value extraction through execution of the Merchant Leverage Effect. Deregulation of the retail gas and power markets is also evolving to encourage greater competition and access to markets. Dynegy's retail gas and electric strategy is designed to access a significant national customer base while mitigating the large capital investment and financial risks necessitated by other national retail marketing strategies. Rather than competing directly with its existing wholesale customers, Dynegy has chosen to strengthen key customer relationships by forming a number of regional retail gas alliances. The combination of Dynegy's low cost energy supply (gas and power) with a regional utility's large, installed customer base and local name recognition positions each alliance to capture a significant portion of the local gas and power market, when those markets fully open to competition. Dynegy's goal is to form a North American network of regional retail energy alliances. Dynegy believes that this strategy will accelerate its penetration of the retail gas and electric markets while significantly reducing financial risk during this period of regulatory uncertainty and restructuring. The following chart provides geographic data on existing and targeted alliance markets. DYNEGY'S RETAIL ALLIANCE NETWORK [Map appears here] Dynegy's integrated vision of the gas and power marketing and power generation businesses in the United States is expected to be replicated throughout Canada, the United Kingdom, Europe and Australia as those markets open up to greater competition, subject to any unique attributes associated with market deregulation in those areas. The Company maintains established energy trading operations in both Canada and in the UK and is continuing to assess local, regional and national markets, regulatory environments and other factors in order to support and direct future economic investment. 3 Liquids Segment This segment principally operates under the name Dynegy Mid-Stream Services and consists of the North American mid-stream liquids operations, as well as the global liquefied petroleum gas transportation and natural gas liquids marketing operations located in Houston and London, and certain other businesses. The North American mid-stream liquids operations are actively engaged in the gathering and processing of natural gas and the transportation, fractionation and storage of NGLs. Dynegy believes that a strategic shift in the historical mid-stream asset business paradigm is occurring as major producers upstream and refiners downstream have divested their ownership in these assets and operations. Traditionally, these operations provided intermediate service and support functions within most integrated petroleum companies. Dynegy believes that it can achieve significant costs and operating efficiencies as well as attractive returns on services provided to the market from the independent ownership and operation of these assets. Dynegy believes that value creation occurs throughout the mid-stream service businesses. As a result, Dynegy has built a vertically integrated natural gas liquids infrastructure having the capability of extracting profit throughout the value chain extending from inlet natural gas volumes gathered from producing horizons throughout the US and Canada to marketing NGLs to wholesalers and end-users throughout the world. DYNEGY'S "LIQUIDS VALUE CHAIN" [Graphic appears here] The Company is a recognized industry leader in substantially all mid-stream component businesses, ranging from natural gas processing to marketing NGLs to end users. Dynegy is the second largest processor of natural gas in the United States; it owns substantial fractionation capacity that exceeds three hundred thousand barrels per day and the Company markets over four hundred fifty thousand barrels of NGLs daily. These activities are supported by an extensive storage and transportation system, which includes in excess of 14,000 miles of natural gas pipelines, 2,000 miles of crude oil pipelines, 500 miles of NGL pipelines and 60 million barrels of NGL storage capacity. To further assist its operations, the Company has access to substantial barge, rail, trucking and terminalling assets as well as large-hull ships having long-haul capabilities, which enhance international trading opportunities. Despite significant consolidation over the last four years, the domestic mid-stream industry remains relatively fragmented and competition for additional inlet volumes remains intense. The recent downturn in NGL prices has put additional pressure on operating margins. Dynegy has responded to these industry conditions by aggressively reducing costs, rationalizing assets in non-core areas and improving its competitive position in core operating areas through asset consolidation and alliances with industry partners. The goal of these efforts is to mitigate the variability of earnings and cash flow caused by fluctuations in commodity prices. 4 OVERVIEW OF SEGMENT BUSINESSES WHOLESALE GAS AND POWER SEGMENT - NATURAL GAS The Company's wholesale natural gas marketing activities are conducted throughout North America and in the United Kingdom. These activities consist of contracting to purchase specific volumes of natural gas from suppliers at various points of receipt to be supplied over a specific period of time; aggregating natural gas supplies and arranging for the transportation of these gas supplies through proprietary and third-party transmission systems; negotiating the sale of specific volumes of natural gas over a specific period of time to local distribution companies (LDCs), utilities, power plants and other end-users; and matching natural gas receipts and deliveries based on volumes required by customers. NATURAL GAS PURCHASES. The Company purchases natural gas from a variety of suppliers under contracts with varying terms and conditions intended to ensure a stable supply of natural gas. When purchasing natural gas, the Company considers price, location, liquids content, if applicable, and quantities available. In 1998, the Company purchased natural gas in every major producing basin in the United States and Canada from over 700 suppliers, ranging from major producers to small independent companies. Pursuant to ancillary agreements entered into as part of the Chevron Combination, Dynegy has the obligation to purchase and the right to market substantially all of the natural gas produced or controlled by Chevron in the United States (except Alaska). The Chevron relationship provides the Company with a significant, stable supply of natural gas which, when combined with gas supplies available from its network of other supply sources, allows it to effectively manage gas supplies and reduces the risk of short-term supply shortages during periods of peak demand. TRANSPORTATION. The Company arranges for transportation of the natural gas it markets from the supplier receipt point to the delivery point requested by the purchaser. The Company generally retains title to the natural gas from the receipt point to the delivery point and obtains transportation on unaffiliated pipelines. The Company believes that its understanding of the United States' pipeline network, along with the scale and geographic reach of its gas marketing efforts, are important to the Company's success as a gas marketer. The Company uses a variety of transportation arrangements to move its customers' volumes, including short-term and long-term firm and interruptible agreements with pipelines and brokered firm contracts with its customers. NATURAL GAS SALES. The Company sells natural gas under sales agreements that have varying terms and conditions intended to match seasonal and other changes in demand. The Company's wholesale customer base consists primarily of gas and electric utilities and industrial and commercial end-users and marketers of natural gas. In 1998, sales were made to approximately 900 customers located throughout the contiguous United States and parts of Canada. For the year ended December 31, 1998, the Company's North American operations sold an aggregate average of 8.2 Bcf per day of natural gas. NATURAL GAS STORAGE. Natural gas storage capacity plays an important role in the Company's ability to act as a full-service natural gas marketer by allowing it to manage relatively constant gas supply volumes with uneven demand levels. Through the use of its storage capabilities, the Company offers peak delivery services to satisfy winter heating and summer electric-generating demands. Storage inventories also provide performance security or "backup" service to the Company's customers. The Company at various times leases short- term and long-term firm and interruptible storage. UNITED KINGDOM. Beginning in 1997, the Company began an independent energy marketing business through a wholly owned subsidiary in the United Kingdom. Additionally, Dynegy maintains a twenty-five percent participating preferred stock interest in Accord Energy Limited ("Accord"), a U.K.-based energy marketing company. During 1998, the Company's U.K. subsidiary purchased product from 42 suppliers and marketed sales to 35 customers. For the year ended December 31, 1998, the Company's U.K.-based operations sold an aggregate average of 0.7 Bcf per day of natural gas. WHOLESALE GAS AND POWER SEGMENT - POWER Dynegy markets electricity and power products and services through Electric Clearinghouse Inc. ("ECI"), an indirect wholly-owned subsidiary, providing a 24- hour-a-day resource for the sale and purchase of power through access to wholesale markets throughout North America. The Company helps generation customers manage and optimize their fuel supplies, optimize generation assets and capacity utilization and maximize energy conversion and tolling opportunities. In addition, the Company provides market aggregation and sales assistance and risk-management services and strategies. The Company will at times contract for transmission capacity over regulated transmission lines in order to facilitate regional movements of power. In 1998, Dynegy made sales to approximately 180 customers and sold 121 million-megawatt hours of electricity. 5 Dynegy has interests in thirty-one power projects in operation, under construction, in late stage development or pending acquisition having combined gross capacity of 6,832 megawatts of electricity. The majority of these facilities are gas-fired and are principally owned through interests in joint ventures formed to operate the plants. In addition to ownership and operation of generating capacity, the Company provides services to the joint ventures in which it owns an interest in the areas of project development, engineering, environmental affairs, operating services, management and fuel supply services. Such management services include: . Engineering oversight of all conceptual planning, feasibility studies, environmental studies and plant, engineering and construction design; . Specialized and comprehensive operating, maintenance, testing and start-up services; . Power and fuel management involving purchases and sales for and from the projects; . Contract negotiation; . Development and maintenance of business plans and forecasts; . Development and implementation of profit improvement opportunities; . Monitoring regulatory, legislative, and environmental affairs; and . Providing various accounting and financial services. LIQUIDS SEGMENT - NATURAL GAS GATHERING AND PROCESSING The natural gas processing industry is a major segment of the oil and gas industry, providing the necessary service of refining raw natural gas into marketable pipeline quality natural gas and natural gas liquids. The Company owns interests in 42 gas processing plants, including 35 plants that it operates, as well as associated and stand-alone natural gas gathering pipeline systems. These assets are primarily located in the key producing areas of New Mexico, Texas, Louisiana, Arkansas, Oklahoma, Kansas and Alberta, Canada. During 1998, the Company processed an average of 2.3 Bcf per day of natural gas and produced an average of 110.0 thousand barrels per day of natural gas liquids. As part of the Chevron Combination's ancillary agreements, Dynegy acquired the right to process substantially all of Chevron's processable natural gas in those geographic areas where it is economically feasible for Dynegy to provide such service. LIQUIDS SEGMENT - FRACTIONATION Natural gas liquids removed from the natural gas stream at gas processing plants are generally in the form of a commingled stream of liquid hydrocarbons (raw product). The commingled natural gas liquids are separated at fractionation facilities into the component products of ethane, propane, normal butane, isobutane and natural gasoline. The Company has ownership interests in three fractionation facilities; two in Mont Belvieu, Texas and one in Lake Charles, Louisiana. During 1998, these facilities fractionated an average of 285 thousand gross barrels per day. LIQUIDS SEGMENT - NGL MARKETING The Company markets its own NGL production and also purchases NGLs from third parties for resale. During 1998, the Company sold approximately 410 thousand barrels per day of natural gas liquids to over 900 customers. LIQUIDS SEGMENT - TRANSPORTATION OPERATIONS The Company's transportation assets are inter-connected with the nation's gas liquids and natural gas pipeline systems. Through this network of pipeline connections, terminals, rail cars, trucks, barges and storage facilities, the Company moves natural gas liquids from producing regions in the Gulf Coast, West and Midwest to most major domestic and international markets. The Company operates large-scale marine terminals in Texas, Florida and Louisiana, which offer importers a variety of methods for transporting products to the marketplace. In addition, Dynegy has access to over 60 million barrels of underground liquids storage providing customers with the ability to store, trade, buy and sell specification products. Dynegy also leases large-hull ships capable of importing/exporting liquid petroleum gas to/from markets throughout the world. 6 LIQUIDS SEGMENT - CRUDE OIL MARKETING The Company provides a full range of crude oil marketing services to producers, and serves the North American refining community as a regionally diversified supplier of crude oil. Through its participation in major trading centers in Canada and the Mid-Continent, Rocky Mountain and Gulf Coast areas, the Company has established itself as a dependable source of competitively priced crude oil. During 1998, the Company sold approximately 240 thousand barrels per day of crude oil to over 100 customers. LIQUIDS SEGMENT - INTERNATIONAL LPG MARKETING The Company markets and trades LPG to markets throughout the world through use of chartered large-hull ships. Product marketed and traded by this business is acquired from producing areas in the North Sea, West Africa, Algeria and the Arabian Gulf as well as from the U.S. Gulf Coast region. Currently, this business markets approximately 75,000 barrels per day of LPG. RISK MANAGEMENT ACTIVITIES Dynegy utilizes certain types of fixed-price forward purchase and sales contracts, futures and option contracts traded on the New York Mercantile Exchange and swaps and options traded in the over-the-counter financial markets to: . Manage and hedge its fixed-price purchase and sales commitments; . Provide fixed-price commitments as a service to its customers and suppliers; . Reduce its exposure to the volatility of cash market prices; . Protect its investment in storage inventories; and . Hedge fuel requirements at its gas processing and power generation facilities. The Company may, at times, have a bias in the market, within established guidelines, resulting from the management of its portfolio. Additionally, Dynegy monitors its exposure to fluctuations in interest rates and foreign currency exchange rates and may execute swaps, forward-exchange contracts or other financial instruments to hedge and manage these exposures. In addition to the risk associated with price or interest rate movements, credit risk is also inherent in the Company's risk management activities. Credit risk relates to the risk of loss resulting from the nonperformance of contractual obligations by a counterparty. Dynegy maintains credit policies with regard to its counterparties, which management believes minimize its overall credit risk. The commercial groups of Dynegy manage, on a portfolio basis, the resulting market risks inherent in the transactions, subject to parameters established by the Dynegy Board of Directors. Market risks are monitored by a risk control group that operates independently from the commercial units that create or actively manage these risk exposures to ensure compliance with Dynegy's risk management policies. Risk measurement is also practiced against the Dynegy portfolios with value at risk, stress testing and scenario analysis. As a result of recent pronouncements issued by the Financial Accounting Standards Board and the Emerging Issues Task Force, the Company's comprehensive method of accounting for energy-related contracts and/or derivative instruments and hedging activities is changing effective January 1, 1999. Refer to "Item 7. - - Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. - Financial Statements and Supplementary Data", for further discussion and analysis of the effects of these accounting principle changes. COMPETITION All phases of the businesses in which Dynegy is engaged are highly competitive. In connection with both domestic and foreign operations, the Company encounters strong competition from companies of all sizes, having varying levels of financial and personnel resources. Dynegy competes in its gas marketing business with other natural gas merchants, producers and pipelines for sales based on its ability to aggregate competitively priced supplies from a variety of sources and locations and to utilize transportation efficiently through third-party pipelines. With respect to its marketing operations, Dynegy believes that: 7 . Customers will increasingly scrutinize the financial condition of their suppliers to assure that contract obligations will be met; . Suppliers and transporters will demand more stringent credit terms to secure the performance of natural gas merchants; . The increased role of storage and other risk management tools will add to the financial costs of doing business; . The increasing availability of pricing information to participants in the natural gas industry will continue to exert downward pressure on per-unit profit margins in the industry; . Suppliers will have to be multi-fuel marketers; and . Large competitors will create competition from entities having significant liquidity and other resources. As a result, Dynegy believes its financial condition and its access to capital markets will play an increasing role in distinguishing the Company from many of its competitors. Operationally, Dynegy believes its ability to remain a low-cost merchant and to effectively combine value-added services, competitively priced supplies and price risk management services will determine the level of success in its natural gas marketing operations. Dynegy's power marketing business is similar to its gas marketing business in that it provides contract services to electric utilities, markets and supplies electricity and invests in power-related assets and joint ventures. As a result, the competitive issues incumbent upon the Company's gas marketing operations similarly affect the Company's power marketing business. As with its gas marketing operations, the Company believes it has the ability to establish itself as a low cost and dependable merchant providing competitively priced supplies and a variety of services which will differentiate Dynegy from the competition. The independent power generation industry has grown rapidly over the past twenty years. The demand for power may be met by generation capacity based on several competing technologies, such as gas-fired or coal-fired cogeneration and power generating facilities fueled by alternative energy sources including hydro power, synthetic fuels, solar, wind, wood, geothermal, waste heat, solid waste and nuclear sources. The Company's power generation business competes with other non-utility generators, regulated utilities, unregulated subsidiaries of regulated utilities and other energy service companies in the development and operation of energy-producing projects. The trend towards deregulation in the U.S. electric power industry has resulted in a highly competitive market for acquisition or development of domestic power generating facilities. As the nation's regulated utilities seek non-regulated investments and states move toward retail electric competition, these trends can be expected to continue for the foreseeable future. The Company's natural gas liquids, crude oil marketing and gas transmission businesses face significant competition from a variety of competitors including major integrated oil companies, major pipeline companies and their marketing affiliates and national and local gas gatherers, processors, brokers, marketers and distributors of varying sizes and experience. The principal areas of competition include obtaining gas supplies for gathering and processing operations, obtaining supplies of raw product for fractionation, the marketing of natural gas liquids, crude oil, residue gas, helium, condensate and sulfur, and the transportation of natural gas, natural gas liquids and crude oil. Competition typically arises as a result of the location and operating efficiency of facilities, the reliability of services and price and delivery capabilities. The Company believes it has the infrastructure, long-term marketing abilities, financial resources and management experience to enable it to effectively compete. Regulation General. The Company is subject to the laws, rules and regulations of the jurisdictions and countries in which it conducts its operations. The regulatory burden on the energy industry increases its cost of doing business and, consequently, affects its profitability. Inasmuch as these rules and regulations are frequently amended or reinterpreted, the Company is unable to predict the future cost or impact of complying with such regulations. These rules and regulations affect the industry as a whole; therefore, the Company does not believe that it is affected in a significantly different manner from its competitors. NATURAL GAS REGULATION. The transportation and sale for resale of natural gas is subject to regulation by the Federal Energy Regulatory Commission ("FERC") under the Natural Gas Act of 1938, as amended ("NGA") and, to a lesser extent, the Natural Gas Policy Act of 1978, as amended ("NGPA"). Interstate transportation and storage services by natural gas companies, including interstate pipeline companies, and the rates charged for such services, are regulated by the FERC. Certain of the Company's pipeline activities and facilities are involved in interstate transportation of natural gas, crude oil and natural gas liquids, and are subject to these or other federal regulations. 8 NATURAL GAS MARKETING. Commencing in 1985, the FERC promulgated a series of orders and regulations adopting changes that significantly altered the business of transporting and marketing natural gas by fostering competition. The thrust of these regulations was to induce interstate pipeline companies to provide nondiscriminatory transportation services to producers, distributors and other shippers. The effect of the foregoing regulations has been the creation of an open access market for natural gas purchases and sales and the creation of a business environment which has fostered the evolution of various unregulated, privately negotiated natural gas sales, purchase and transportation arrangements. Regulations in Canada have resulted in a similar business environment in that country. The sale for resale of natural gas in North America has substantially completed its evolution to an unregulated, open access market. The Company does not believe that any further regulatory matters will have a material adverse effect on the Company's operations or competitiveness. In the latter half of 1998, the FERC issued two proposed rulemakings in which it laid out possible changes to the character of interstate transportation services. Some proposed changes could benefit the Company, while others could have a negative impact. It is too early to predict which, if any, changes will be implemented. In Canada, certain federal and provincial regulatory authorities require parties to hold export or removal permits for transactions pursuant to which natural gas is to be exported from the jurisdiction in which it is produced. These requirements apply whether the gas is removed from one province to another or from a province to the United States. The Company's indirectly wholly-owned Canadian subsidiary, Dynegy Canada Inc., holds permits from the National Energy Board, the Alberta Energy and Utilities Board ("AEUB") and the British Columbia Ministry of Employment and Investment, Oil and Gas Section for such purposes. In addition, Dynegy Canada Inc. holds export permits from the National Energy Board similar to the foregoing for butane, propane and crude oil. In the United Kingdom, regulation of the natural gas business is subject to regulation by the Office of Gas Supply. GAS PROCESSING. The primary function of Dynegy's gas processing plants is the extraction of natural gas liquids and the conditioning of natural gas for marketing, and not natural gas transportation. The FERC has traditionally maintained that a processing plant is not a facility for transportation or sale for resale of natural gas in interstate commerce and therefore is not subject to jurisdiction under the NGA. Even though the FERC has made no specific declaration as to the jurisdictional status of the Company's gas processing operations or facilities, Dynegy believes its gas processing plants are primarily involved in removing natural gas liquids and therefore exempt from FERC jurisdiction. Nonetheless, certain facilities downstream of processing plants are being considered for use in transporting gas between pipelines, which may invoke FERC's jurisdiction. Such jurisdiction should apply to the downstream facility as a pipeline, however, and not to the plants themselves. In Canada, the AEUB governs the permitting, emissions and operations of gas gathering and processing facilities. These facilities require a permit from the AEUB to process or transport a specified volume of gas and a demonstration at the time of application that the impact on the environment will be minimal. Dynegy Canada Inc. holds all necessary permits required in order to own and operate its processing and gathering facilities. Notwithstanding the jurisdiction of the AEUB, the rates, terms and conditions of service of such facilities are the result of privately negotiated arrangements. Gathering. The NGA exempts gas-gathering facilities from the jurisdiction of the FERC. Interstate transmission facilities, on the other hand, remain subject to FERC jurisdiction. The FERC has historically distinguished between these two types of facilities on a fact-specific basis. Dynegy believes its gathering facilities and operations meet the current tests used by the FERC to determine a nonjurisdictional gathering facility status. Some of the recent cases applying these tests in a manner favorable to the determination of Dynegy's nonjurisdictional status are still subject to rehearing and appeal. In addition, the FERC's articulation and application of the tests used to distinguish between jurisdictional pipelines and nonjurisdictional gathering facilities have varied over time. While the Company believes current definitions create nonjurisdictional status for Dynegy's gathering facilities, no assurance can be given that such facilities will remain classified as gas gathering facilities and the possibility exists that the rates, terms, and conditions of the services rendered by those facilities, and the construction and operation of the facilities will be subject to regulation by the FERC or by the various states in the absence of FERC regulation. OTHER REGULATORY ISSUES. The Company's gas purchases and sales are generally not regulated by the FERC or other regulatory authorities; however, as a gas merchant, the Company depends on the gas transportation and storage services offered by various pipeline companies to enable the sale and delivery of its gas supplies. Additionally, certain other pipeline activities and facilities of the Company are involved in interstate and intrastate transportation and storage services and are subject to various federal and state regulations which generally regulate rates, terms and conditions of service. 9 ELECTRICITY MARKETING REGULATION. The Federal Power Act ("FPA") and rules promulgated by the FERC regulate the transmission of electric power in interstate commerce and sales for resale of that power. As a result, portions of ECI's operations are under the jurisdiction of the FPA and FERC. In April 1996, the FERC adopted rules ("Order 888") to expand transmission service and access and provide alternative methods of pricing for transmission services. Order 888 is intended to open the FERC-jurisdictional interstate transmission grid in the continental United States to all qualified persons that seek transmission services to wheel wholesale power. Utilities are required to provide transmission customers non-discriminatory open access to their transmission grids with rates, terms, and conditions comparable to that which the utility imposes on itself. Order 888 was upheld by the FERC in March 1997 and is subject to appeal. Second generation implementation issues arising out of Order 888 abound. These include issues relating to power pool structures and transmission pricing. These too will likely find their way to the courts, and their outcome cannot be predicted. POWER GENERATION REGULATION. Historically in the United States, regulated and government-owned utilities have been the only significant producers of electric power for sale to third parties. Pursuant to the enactment of the federal Public Utility Regulatory Policies Act of 1978 ("PURPA"), companies other than utilities were encouraged to enter the electric power business by reducing regulatory constraints. In addition, PURPA and its implementing regulations created unique opportunities for the development of cogeneration facilities by requiring utilities to purchase electric power generated in cogeneration plants meeting certain requirements (referred to as "Qualifying Facilities"). As a result of PURPA, a significant market for electric power produced by independent power producers developed in the United States. The exemptions from extensive federal and state regulation afforded by PURPA to Qualifying Facilities are important to Dynegy and its competitors. Many of the projects that Dynegy currently owns meet the requirements under PURPA to be Qualifying Facilities and are maintained on that basis. In 1992, Congress enacted the Energy Policy Act of 1992 ("Energy Act"), which amended the FPA and the Public Utility Holding Company Act of 1935 ("PUHCA") to create new exemptions from PUHCA for independent power producers selling electric energy at wholesale, to increase electricity transmission access for independent power producers and to reduce the burdens of complying with PUHCA's restrictions on corporate structures for owning or operating generating or transmission facilities in the United States or abroad. The Energy Act has enhanced the development of independent power projects and has further accelerated the changes in the electric utility industry that were initiated by PURPA. Changes in PURPA, PUHCA and other related federal statutes may occur in the next several years. The nature and impact of such changes on the Company's projects, operations and contracts is unknown at this time. Dynegy actively monitors these developments to determine such impacts as well as to evaluate new business opportunities created by restructuring of the electric power industry. Depending on the outcome of these legislative matters, changes in legislation could have an adverse effect on current contract terms. The enactment in 1978 of PURPA and the adoption of regulations thereunder by the FERC and individual states provide incentives for the development of small power production facilities and cogeneration facilities meeting certain criteria. In order to be a Qualifying Facility, a cogeneration facility must (i) produce not only electricity but also a certain quantity of thermal energy (such as steam) which is used for a qualified purpose other than power generation, (ii) meet certain energy operating and efficiency standards when oil or natural gas is used as a fuel source and (iii) not be controlled or more than 50 percent owned by an electric utility or electric utility holding company, or any combination thereof. PURPA provides two primary benefits to Qualifying Facilities owned and operated by non-utility generators. First, Qualifying Facilities under PURPA are exempt from certain provisions of PUHCA, the FPA and, except under certain limited circumstances, state laws respecting rate and financial regulation. Second, PURPA requires that electric utilities purchase electricity generated by Qualifying Facilities at a price equal to the purchasing utility's full "avoided cost" and that the utility sell back-up power to the Qualifying Facility on a non-discriminatory basis. The FERC regulations also permit Qualifying Facilities and utilities to negotiate agreements for utility purchases of power at rates other than the purchasing utility's avoided cost. If Congress amends PURPA, the statutory requirement that an electric utility purchase electricity from a Qualifying Facility at full avoided costs could be eliminated. Although current legislative proposals specify the honoring of existing contracts, repeal of the statutory purchase requirements of PURPA going forward could increase pressure to renegotiate existing contracts. Any changes that result in lower contract prices could have an adverse effect on the Company's operations and financial position. The Congress passed the Energy Act to promote further competition in the development of new wholesale power generation sources. Through amendments to PUHCA, the Energy Act encourages the development of independent power projects that are certified by the FERC as exempt wholesale generators ("EWGs"). The owners or operators of qualifying EWGs are exempt from the provisions of PUHCA. The Energy Act also provides the FERC with extensive new authority to order electric utilities to provide other electric utilities, Qualifying Facilities and independent power projects with access to their transmission systems. However, the Energy Act does preclude the FERC from ordering transmission services to retail customers and prohibits 10 "sham" wholesale energy transactions which appear to provide wholesale service, but actually are providing service to retail customers. The FPA grants the FERC exclusive ratemaking jurisdiction over wholesale sales of electricity in interstate commerce. The FPA provides the FERC with ongoing as well as initial jurisdiction, enabling the FERC to revoke or modify previously approved rates. Such rates may be based on a cost-of-service approach or on rates that are determined through competitive bidding or negotiation on a market basis. Although Qualifying Facilities under PURPA are exempt from ratemaking and certain other provisions of the FPA, independent power projects and certain power marketing activities are subject to the FPA and to the FERC's ratemaking jurisdiction. Utilities are not obligated to purchase power from projects subject to regulation by the FERC under the FPA because they do not meet the requirements of PURPA. However, because such projects would not be bound by PURPA's thermal energy use requirement, they may have greater latitude in site selection and facility size. All of the projects currently owned or operated by Dynegy as Qualifying Facilities under PURPA are exempt from the FPA. Dynegy's EWGs, El Segundo, Long Beach, Commonwealth Atlantic and Hartwell, are subject to the FPA and the jurisdiction of the FERC. With approval from FERC, such entities, with certain exceptions, are exempted from being required to sell at cost-based rates and can make all sales at market-based rates set through negotiations. Independent power projects in which the Company has an interest and that are not Qualifying Facilities have been granted market based rate authority and comply with the FPA requirements governing approval of wholesale rates and subsequent transfers of ownership interests in such projects. Development of projects in international markets typically creates exposure and obligations to the national, provincial and local laws of each host country, worldwide environmental standards and requirements imposed by multi-lateral lending institutions. The principal regulatory consideration for international projects is PUHCA, since it is broadly applicable to the ownership and operation of power facilities (including generation and transmission facilities) both inside and outside of the United States. For international projects, the principal basis for exemption from PUHCA is by obtaining EWG status from the FERC. EWG status is very beneficial for international projects because EWGs are generally allowed to make retail sales in international markets. Another way to obtain an exemption from PUHCA for foreign ownership and operation activities is by filing a foreign utility company determination ("FUCO") with the Securities and Exchange Commission. However, FUCO filings are less frequently used, because unlike EWGs, no formal regulatory order is issued confirming the status of a FUCO. The development of international power generation and transmission projects also may entail other multi-national regulatory considerations arising under United States law, including export/import controls, trade laws and other similar legislation. Dynegy attempts to identify and manage those issues early in the development process to ensure compliance with such laws and regulations. STATE REGULATORY REFORMS. Legislation currently under review in various states affecting gas and power marketing and power generation businesses is most likely to impact Dynegy in the near term. However, other state regulatory reforms impacting the Company's processing and gathering operations and other businesses are proceeding. While the ultimate impact of such legislation on the Company's businesses cannot be predicted with certainty, the Company does not believe that the outcome of these matters will have a material adverse effect on the Company's operations or competitiveness. ENVIRONMENTAL AND OTHER MATTERS Dynegy's operations are subject to extensive federal, state and local statutes, rules and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Development of projects in international markets creates exposure and obligations to the national, provincial and local laws of each host country, including environmental standards and requirements imposed by these governments. Compliance with these statutes, rules and regulations requires capital and operating expenditures including those related to monitoring, pollution control equipment, emission fees and permitting at various operating facilities and remediation obligations. Failure to comply with these statutes, rules and regulations may result in the assessment of civil and even criminal penalties. The Company's environmental expenditures have not been prohibitive in the past, but are anticipated to increase in the future with the trend toward stricter standards, greater regulation, more extensive permitting requirements and an increase in the number and types of assets operated by the Company subject to environmental regulation. No assurance can be given that future compliance with these environmental statutes, rules and regulations will not have a material adverse effect on the Company's operations or its financial condition. The vast majority of federal environmental remediation provisions are contained in the Superfund laws -- the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and the Superfund Amendments and Reauthorization Act ("SARA") and in the corrective action provisions of the Federal Resource Conservation and Recovery Act ("RCRA"). Typically, the U.S. Environmental Protection Agency ("EPA") acts pursuant to Superfund legislation to 11 remediate facilities that are abandoned or inactive or whose owners are insolvent; however, the legislation may be applied to sites still in operation. Superfund law imposes liability, regardless of fault or the legality of the original conduct, on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the current or previous owner and operator of a facility and companies that disposed, or arranged for the disposal, of the hazardous substance found at a facility. CERCLA also authorizes the EPA and, in certain instances, private parties to take actions in response to threats to public health or the environment and to seek recovery for the costs of cleaning up the hazardous substances that have been released and for damages to natural resources from such responsible party. Further, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. RCRA provisions apply to facilities that have been used to manage or are currently managing hazardous waste and which are either still in operation or have recently been closed. As amended, RCRA requires facilities to remedy any releases of hazardous wastes or hazardous waste constituents at waste treatment, storage or disposal facilities. In connection with discrete asset acquisitions and sales, Dynegy may obtain or be required to provide indemnification against certain environmental liabilities. These indemnities are typically limited in scope and time period. To minimize its exposure for such liabilities, environmental audits of the assets Dynegy wishes to acquire are made, either by Dynegy personnel, outside environmental consultants, or a combination of the two. The Company has not heretofore incurred any material environmental liabilities arising from its acquisition or divestiture activities. The incurrence of a material environmental liability, and/or the failure of an indemnitor to meet its indemnification obligations with respect thereto, could have a material adverse effect on Dynegy's operations and financial condition. To the Company's knowledge, it is in substantial compliance with, and is expected to continue to comply in all material respects with, applicable environmental statutes, regulations, orders and rules. Further, to the best of the Company's knowledge, there are no existing, pending or threatened actions, suits, investigations, inquiries, proceedings or clean-up obligations by any governmental authority or third party relating to any violations of any environmental laws with respect to the Company's assets or pertaining to any indemnification obligations with respect to properties previously owned or operated by the Company which would have a material adverse effect on the Company's operations and financial condition. Dynegy's aggregate expenditures for compliance with laws and regulations related to the discharge of materials into the environment or otherwise related to the protection of the environment approximated $9 million in 1998. Total environmental expenditures for both capital and operating maintenance and administrative costs are not expected to exceed $14 million in 1999. In addition to environmental regulatory issues, the design, construction, operation and maintenance of the Company's pipeline facilities are subject to the safety regulations established by the Secretary of the Department of Transportation pursuant to the Natural Gas Pipeline Safety Act ("NGPSA"), or by state regulations meeting the requirements of the NGPSA, or to similar statutes, rules and regulations in Canada. The Company believes it is currently in substantial compliance, and expects to continue to comply in all material respects, with these rules and regulations. The Company's operations are subject to the requirements of the Federal Occupational Safety and Health Act ("OSHA") and other comparable federal, state and provincial statutes. The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of SARA and similar state statutes require that information be organized and maintained about hazardous materials used or produced in its operations. Certain of this information must be provided to employees, state and local government authorities and citizens. The Company believes it is currently in substantial compliance, and expects to continue to comply in all material respects, with these rules and regulations. OPERATIONAL RISKS AND INSURANCE Dynegy is subject to all risks inherent in the various businesses in which it operates. These risks include, but are not limited to, explosions, fires and product spillage, which could result in damage to or destruction of operating assets and other property, or could result in personal injury, loss of life or pollution of the environment, as well as curtailment or suspension of operations at the affected facility. Dynegy maintains general public liability, property and business interruption insurance in amounts that it considers to be adequate for such risks. Such insurance is subject to deductibles that the Company considers reasonable and not excessive. The occurrence of a significant event not fully insured or indemnified against, and/or the failure of a party to meet its indemnification obligations, could materially and adversely affect Dynegy's operations and financial condition. Moreover, no assurance can be given that Dynegy will be able to maintain insurance in the future at rates it considers reasonable. 12 The Company has designated two of its subsidiaries to assist in the management of certain liabilities principally relating to environmental, litigation and credit reserves. Together with the involvement of third parties whose primary consideration will be based on the realization of savings by the Company, the subsidiaries will attempt to find new ways to handle these costs in a more efficient manner. EMPLOYEES The Company employs approximately 1,220 employees at its administrative offices and approximately 1,214 employees at its operating facilities. Approximately 137 employees at Company-operated facilities are subject to collective bargaining agreements with one of the following unions: the Oil, Chemical and Atomic Workers International Union, the Metal Trades Council or the Communications, Energy and Paperworkers Union. Management considers relations with both union and non-union employees to be satisfactory. ITEM 1A. EXECUTIVE OFFICERS Set forth below are the names and positions of the current executive officers of the Company, together with their ages, position(s) and years of service with the Company.
Served with the Name Age * Position(s) Company Since C. L. Watson 49 Chairman of the Board, Chief Executive Officer, 1985 and a Director of the Company Stephen W. Bergstrom 41 President and Chief Operating Officer of 1986 Dynegy Marketing and Trade, and a Director of the Company John U. Clarke 46 Senior Vice President, Chief Financial Officer 1997 of the Company, and an Advisory Director of the Company Dan W. Ryser 49 Executive Vice President of Dynegy Marketing 1993 and Trade Stephen A. Furbacher 51 President and Chief Operating Officer of 1996 Dynegy Mid-Stream Services Kenneth E. Randolph 42 Senior Vice President, General Counsel and 1984 Secretary of the Company
* As of April 1, 1999. The executive officers named above will serve in such capacities until the next annual meeting of the Company's Board of Directors, or until their respective successors have been duly elected and have been qualified, or until their earlier death, resignation, disqualification or removal from office. C. L. Watson is the Chairman and Chief Executive Officer of Dynegy Inc. He joined the company as President in 1985 and became Chairman and Chief Executive Officer of NGC Corporation, Dynegy's predecessor, in 1989. Prior to his employment with Clearinghouse, he served as Director of Gas Sales for the Western United States for Conoco Inc. Mr. Watson serves on the board of directors of Baker Hughes Incorporated. Stephen W. Bergstrom, President and Chief Operating Officer of Dynegy Marketing and Trade and Senior Vice President of Dynegy Inc., is responsible for natural gas and power marketing, generation and international functions. He is also a member of Dynegy's board of directors. After joining Natural Gas Clearinghouse, the predecessor of Dynegy, in 1986 as Vice President of Gas Supply, Mr. Bergstrom was promoted to Senior Vice President of Gas Marketing and Supply in 1987. In 1990, he was named Executive Vice President of Natural Gas Clearinghouse. Prior to joining the Company, Mr. Bergstrom 13 was Vice President of Gas Supply for Enron Gas Marketing. Mr. Bergstrom began his professional career with Transco Energy Company of Houston. John U. Clarke joined the Company in April 1997 as Senior Vice President and Chief Financial Officer and serves as the Company's principal financial officer. Mr. Clarke is also an Advisory Director of the Company. Prior to joining Dynegy, Mr. Clarke was a managing director and co-head of a specialty energy practice group with Simmons & Company International, an investment- banking firm for approximately one year. He previously had served as President of Concept Capital Group, Inc., a financial advisory firm formed by Mr. Clarke in May, 1995. Mr. Clarke was Executive Vice President and Chief Financial and Administrative Officer with Cabot Oil & Gas Corporation from August 1993 to February 1995, and worked for Transco Energy Company, from April 1981 to May 1993, last serving as Senior Vice President and Chief Financial Officer. Mr. Clarke began his career with Tenneco Inc. in January 1978. Dan W. Ryser serves as Senior Vice President of Dynegy Inc. and executive Vice President of Dynegy Marketing and Trade. Mr. Ryser manages the Company's power generation business. Since joining Dynegy in 1993, Mr. Ryser has served the Company in several capacities, including managing ECI's electricity marketing operations. Prior to joining the Company in 1993, Mr. Ryser held various positions at Enron Corp. including President of Enron Gas Processing Company, President of Transwestern Pipeline Company, Executive Vice President of Enron Gas Marketing and President of Houston Pipe Line Company. Stephen A. Furbacher serves as President and Chief Operating Officer of Dynegy Mid-Stream Services. In this capacity, Mr. Furbacher is responsible for the operations of Dynegy's North American mid-stream liquids operations, as well as the global liquefied petroleum gas transportation and natural gas liquids marketing operations. The North American mid-stream liquids operations are actively engaged in the gathering and processing of natural gas and the transportation, fractionation and storage of NGLs. Prior to joining the Company in September 1996, Mr. Furbacher served as President of Warren Petroleum Company, a division of Chevron U.S.A. Inc. Kenneth E. Randolph serves as Senior Vice President, General Counsel and Secretary of the Company. He has served as Senior Vice President and General Counsel of Dynegy (or its predecessor, Clearinghouse) since July 1987. In addition, he served as a member of the Clearinghouse Management Committee from May 1989 through February 1994 and managed Clearinghouse's marketing operations in the Western and Northwestern United States from July 1984 through July 1987. Prior to his employment with the Company, Mr. Randolph was associated with the Washington, D.C. office of Akin, Gump, Strauss, Hauer & Feld, L.L.P. 14 ITEM 2. PROPERTIES Over the last 5 years, Dynegy has built a national network of strategic assets that support and enhance its wholesale gas, liquids and power marketing franchise. The following provides a geographic view of the depth and breadth of Dynegy's domestic strategic asset network. DYNEGY'S STRATEGIC ASSET NETWORK [Map appears here] Current year operational activity conducted in these areas is discussed under "Item 1. BUSINESS -- General." Following is a description of such properties owned by the Company at December 31, 1998. POWER GENERATION FACILITIES Dynegy has interests in thirty-one power projects in operation, under construction, in late stage development or pending acquisition. The majority of these projects are cogeneration facilities operated by Dynegy. The portfolio includes one heat recovery plant and one coal gasification facility. A cogeneration plant utilizes power production technology that results in the sequential generation of two or more useful forms of energy (e.g., electricity and steam) from a single fuel source (e.g., natural gas). The Company's generation assets include projects that are deemed Qualifying Facilities, EWGs and "Merchant Plants". A Qualifying Facility is operated under laws outlined in PURPA, by the FERC and by certain state legislatures, as previously discussed herein, and typically sells the power it generates to a single power purchaser. A Merchant Plant operates independently from designated power purchasers and as a result will generate and sell power to the market when market economics dictate that electricity prices exceed the cost of production. Merchant Plants provide flexibility to the Company in executing its Energy Convergence strategy. The combined gross capacity of facilities in operation is approximately 4,409 megawatts of electricity and over 3.4 million pounds per hour of steam sold to third parties. The following table provides pertinent information concerning power projects owned by the Company: 15
SUMMARY OF DYNEGY'S POWER GENERATION FACILITIES =========================================================================================================================== POWER GENERATION PERCENT GROSS PRIMARY PROJECT OWNED CAPACITY LOCATION FUEL PRIMARY POWER PURCHASER - ----------------- -------- -------- -------- -------- ----------------------- (MW) OPERATING CoGen Power 100 5 Port Arthur, TX Waste heat Great Lakes Carbon Corporation CoGen Lyondell Lessee (100%) 610 Channelview, TX Gas-fired Lyondell Chemical Company Oyster Creek 50 424 Freeport, TX Gas-fired The Dow Chemical Company Corona 40 47 Corona, CA Gas-fired SOCAL Edison Company Kern Front 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company High Sierra 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company Double "C" 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company San Joaquin 100 48 Stockton, CA Gas-fired Pacific Gas & Electric Company Chalk Cliff 100 46 Kern County, CA Gas fired Pacific Gas & Electric Company Badger Creek 50 46 Kern County, CA Gas-fired Pacific Gas & Electric Company McKittrick 50 46 McKittrick, CA Gas-fired Pacific Gas & Electric Company Live Oak 50 47 Kern County, CA Gas-fired Pacific Gas & Electric Company Crockett 8 240 Crockett, CA Gas-fired Pacific Gas & Electric Company Bear Mountain 100 46 Bakersfield, CA Gas-fired Pacific Gas & Electric Company El Segundo 50 1,020 El Segundo, CA Gas-fired Merchant Facility Long Beach 50 530 Long Beach, CA Gas-fired Merchant Facility Black Mountain 50 85 Las Vegas, NV Gas-fired Nevada Power Company Commonwealth Atlantic 50 340 Chesapeake, VI Gas-fired Virginia Electric & Power Company Hartwell Energy 50 300 Hart County, GA Gas-fired Ogelthorpe Power Corporation Michigan Power 50 123 Ludlington, MI Gas-fired Consumers Energy Company Wabash Lessee (100%) 262 W. Terre Haute, IN Gasification PSI Energy, Inc. ----- TOTAL 4,409 DEVELOPMENT PROJECTS (1) Rockingham 100 800 Rockingham County, NC Gas-fired Duke Energy (3 years) Rocky Road (2) 100 250 Chicago, IL. Gas-fired Merchant Facility Encina Acquisition 50 1,218 San Diego County, CA. Gas-fired Merchant Facility CoGen Lyondell Expansion 100 155 Channelview, TX. Gas-fired Merchant Facility ----- Total 2,423 ----- TOTAL CAPACITY 6,832 ============================================================================================================================
(1) The Encina Acquisition includes the Encina generating facility and seventeen combustion turbines in the San Diego, Ca. Area. The transaction is expected to close in the first half of 1999. (2) This project is currently owned 100 percent by Dynegy but the Company expects to divest itself of 50 percent of its ownership interest during 1999. GATHERING SYSTEMS AND PROCESSING FACILITIES Dynegy's natural gas processing services are provided at two types of gas processing plants, referred to as field and straddle plants. Field plants aggregate volumes from multiple producing wells into quantities that can be economically processed to extract natural gas liquids and to remove water vapor, solids and other contaminants. Straddle plants are situated on mainline natural gas pipelines and allow operators to extract natural gas liquids from a natural gas stream when the market value of natural gas liquids separated from the natural gas stream is higher than the market value of the same unprocessed natural gas. The following table provides certain information, including operational data for the year ended December 31, 1998, concerning the gas processing plants and gathering systems in which Dynegy owns an interest. 16
SUMMARY OF DYNEGY'S GAS PROCESSING FACILITIES =================================================================================================================================== LOCATION TOTAL PLANT -------------------------------- ----------------------------- PRACTICAL 1998 INLET NGL GAS PROCESSING FACILITIES % OWNED COUNTY/PARISH STATE CAPACITY (2) THROUGHPUT PRODUCTION - ----------------------------------------------------------------------------------------------------------------------------------- (MMCF/D) (1) (BPD) (1) OPERATED FIELD PLANTS: Binger (3) 100.00 Caddo OK 10 7.2 900.1 Bridger Lake (7) 100.00 Summit UT 25 10.5 434.0 Canadian Complex (3) 100.00 Hemphill TX 25 20.5 2,000.0 Chico Complex (3) 100.00 Wise TX 100 79.7 11,798.4 East Texas (3) 100.00 Gregg TX 34 20.1 3,379.8 Eustace (3) 100.00 Henderson TX 70 32.2 2,002.6 Fashing 58.24 Atascosa TX 38 14.3 286.8 Gladys 100.00 Alberta Can. 15 4.7 60.0 Leedey (3) 100.00 Roger Mills OK 50 31.5 2,891.2 Lefors Complex (3) 100.00 Wheeler TX 13 12.5 2,906.4 Madill (3) 100.00 Marshall OK 25 9.0 636.1 Mazeppa 100.00 Alberta Can. 82 37.6 475.0 Moores Orchard (3) 100.00 Fort Bend TX 7 3.4 71.7 Monahans (3) 100.00 Ward TX 31 24.5 1,378.1 New Hope 100.00 Franklin TX 30 16.4 993.2 Niject 16.00 Caddo OK 3.2 0.3 34.9 Ringwood (3) 100.00 Major OK 75 33.1 2,286.1 Rodman (3) 100.00 Garfield OK 65 52.7 5,086.7 Sand Hills Complex (3) 100.00 Crane TX 200 152.8 14,605.5 Sherman (3) 100.00 Grayson TX 33 20.6 853.0 Sligo 100.00 Bossier LA 40 35.4 593.8 Texarkana (3) 100.00 Miller AR 22 11.5 393.6 West Seminole (3) 40.14 Gaines TX 5 12.9 504.9 Versado Gas Processors Joint 63.00 Various TX / NM 376 161.8 19,088.0 Venture (8) OPERATED STRADDLE PLANTS: Barracuda 100.00 Cameron LA 190 169.4 3,442.0 Cheney 100.00 Kingman KS 85 62.9 3,603.6 Lowry (3) 100.00 Cameron LA 265 67.6 1,647.8 Stingray 100.00 Cameron LA 300 292.5 2,229.4 Yscloskey (5) 21.00 St. Bernard LA 473 372.8 6,351.0 NON-OPERATED FIELD PLANTS: Diamond M (3) 3.98 Scurry TX 1 0.7 117.9 Spivey (4) (5) 3.87 Harper KS 3 0.8 43.2 Dover Hennessey (3) 18.29 Kingfisher OK 14 5.0 525.6 Indian Basin (3) 14.29 Eddy NM 30 27.1 1,519.1 Maysville (3) 44.00 Garvin OK 59 38.1 5,245.8 Snyder (3) (6) 3.25 Scurry TX 2 1.8 73.9 NON-OPERATED STRADDLE PLANTS: Bluewater 16.72 Acadia LA 122 42.8 952.1 Calumet (5) 21.91 St. Mary's LA 300 223.4 4,696.1 Iowa 9.92 Jefferson LA 50 31.2 647.5 Davis Patterson 1.09 St. Mary's LA 3 0.7 26.4 Sea Robin 18.70 Vermillion LA 187 17.6 803.6 Terrebone 0.83 Terrebone LA 10 4.0 74.8 Toca 8.86 St. Bernard LA 93 114.2 4,361.8 ==============================================================================================================================
(1) Capacity, throughput and gross production are net to the Company's ownership interest. (2) Capacity data is at practical recovery rates, net to Dynegy's interest. (3) Dynegy owns the indicated percentage of an associated gas gathering system. (4) Dynegy owns 2.19 percent of the associated gas gathering system. (5) Dynegy ownership is adjustable and subject to periodic (usually annual) redetermination. (6) Dynegy owns the indicated percentage of the Snyder gas gathering system and 3.98 percent of the Diamond M gas gathering system that also supplies the Snyder plant. (7) This facility consists of a 100 percent interest in a processing plant and an NGL pipeline, a 100 percent interest in a crude oil pipeline and a 33.33 percent interest in reserves connected and dedicated to the plant. (8) Versado Gas Processors includes the Saunders, Monument and the Eunice Complex facilities. Ownership in the Saunders, Monument and Eunice facilities changed from 100 percent to 63 percent during 1998 as a result of formation of a joint venture with Texaco. Statistical information includes the aggregate inlet gas throughput and NGL production volumes accruing to Dynegy's interest during the year. 17 FRACTIONATION FACILITIES The following table provides certain information concerning stand alone fractionation facilities in which Dynegy owns an interest.
SUMMARY OF DYNEGY'S FRACTIONATION FACILITIES (1) PERCENT 1998 FRACTIONATION FACILITIES OWNED GROSS CAPACITY (2) NET CAPACITY (2) INLET THROUGHPUT ------------------------ ------- ------------------ ---------------- ---------------- (MBbls/d) (MBBLS/D) (MBBLS/D) Lake Charles, La. (3) 100.00 55 55 28 Cedar Bayou Fractionators (Mont Belvieu, Tx.) (4) 88.00 205 180 158 Gulf Coast Fractionators (Mont Belvieu, Tx.) 38.75 110 42 99 =======================================================================================================================
(1) Table does not include fractionation operations at VESCO or at other gas processing facilities. (2) Gross capacity data is at practical recovery rates and net capacity is at practical rates multiplied by Dynegy's interest. (3) The Lake Charles, La. Fractionator extracts ethane and propane only. (4) Effective January 1, 1998, Dynegy's interest in this facility was reduced to 88 percent as a result of a formation of a joint venture with Amoco. STORAGE AND TERMINAL FACILITIES The following table provides information concerning terminal and storage facilities owned by the Company:
SUMMARY OF DYNEGY'S STORAGE AND TERMINAL FACILITIES LOCATION ---------------------------------------- STORAGE AND TERMINAL FACILITIES % OWNED COUNTY/PARISH STATE DESCRIPTION -------------------------------------------------------------------------------------------------------------------- Hackberry Storage 100.00 Cameron LA NGL storage facility Mont Belvieu Storage 100.00 Chambers TX NGL storage facility Hattiesburg Storage 100.00 Washington MS NGL storage facility Mont Belvieu Terminal 100.00 Chambers TX Product terminal facility Galena Park Terminal 100.00 Harris TX LPG import/export terminal Calvert City Terminal 100.00 Marshall KY Product transport terminal Greenville Terminal 100.00 Washington MS Propane terminal Hattiesburg Terminal 50.00 Forrest MS Propane terminal Pt. Everglades Terminal 100.00 Broward FL Marine propane terminal Tampa Terminal 100.00 Hillsborough FL Marine propane terminal Tyler Terminal 100.00 Smith TX Product terminal Mont Belvieu Transport 100.00 Chambers TX Offices and repair shop Abilene Transport 100.00 Taylor TX Raw LPG transport terminal Bridgeport Transport 100.00 Jack TX Raw LPG transport terminal Gladewater Transport 65.00 Gregg TX Raw LPG transport terminal Grand Lake Tank Farm 100.00 Cameron LA Condensate storage ====================================================================================================================
18 NATURAL GAS, LIQUIDS AND CRUDE OIL PIPELINES Dynegy owns interests in various interstate and intrastate pipelines and gathering systems as follows:
SUMMARY OF DYNEGY'S PIPELINE ASSETS PIPELINE SYSTEMS % OWNED 1998 THROUGHPUT (1) STATES DESCRIPTION -------------------------------------------------------------------------------------------------------------------- Crude Oil Pipeline System 100.00 24.1 TX/OK Crude oil pipelines Kansas Gas Supply 100.00 61.5 KS/OK Intrastate natural gas pipeline Dynegy NGL Pipeline 100.00 27.1 TX/LA Interstate liquids pipeline Bridger Lake/Phantex 100.00 0.4 UT/WY Interstate liquids pipeline Pipeline Pelican Pipeline 100.00 42.0 LA Gas gathering pipeline Vermillion Pipeline 100.00 11.4 Gulf of Mexico Gas gathering pipeline Western Gas Gathering 100.00 2.9 KS Gas gathering pipeline Pawnee Rock 100.00 11.7 KS Gas gathering pipeline Seahawk 100.00 41.2 LA Intrastate natural gas pipeline Dynegy Midstream Pipeline, 100.00 34.1 OK Intrastate natural gas pipeline Inc. Dynegy Intrastate Gas 100.00 6.2 TX Intrastate natural gas pipeline Supply Lake Boudreaux 100.00 1.0 LA Gas gathering pipeline Grand Lake Liquids System 100.00 1.3 LA Intrastate liquids pipeline ====================================================================================================================
(1) 1998 throughput is based on thousands of barrels per day for the liquids and crude lines and million cubic feet per day for the gas gathering and transportation lines. OTHER PROPERTY INVESTMENTS Dynegy owns a 49 percent interest in a partnership that owns and operates the West Texas LPG Pipeline, an interstate LPG pipeline. The interest was acquired in the Chevron Combination. In 1996, the Company and Chevron formed Venice Gas Processing Company, a Texas limited partnership ("Venice"). Venice was formed for the purpose of owning and operating the Venice Complex, located in Plaquemines Parish, Louisiana. The complex includes 271 miles of gathering pipeline that extends into the Gulf of Mexico having capacity of 810 MMcf/d, a one lean oil gas processing plant, a 35,000 barrel per day fractionator, a 300 MMcf/d cryogenic gas processing unit, 12 million barrels of NGL storage capacity, a marine terminal and acreage. In 1997, Venice reorganized as a limited liability company changing its name to VESCO. In September 1997, the VESCO members agreed to expand ownership in VESCO to include an affiliate of Shell Midstream Enterprises, a subsidiary of Shell Oil Company ("Shell"), effective September 1, 1997, in exchange for Shell's commitment of certain offshore reserves to VESCO. In 1998, ownership in the LLC was again expanded to include Koch, in exchange for their contribution of the cryogenic processing unit. At December 31, 1998, Dynegy's interest in VESCO approximated 23 percent. Dynegy operates the facility and has commercial responsibility for product distribution and sales. During 1997, the Company contributed the Waskom gas processing facility to the Waskom Gas Processing Company ("Waskom"), a Texas limited partnership. Dynegy owns a 33 percent interest in Waskom, operates the facility and has commercial responsibility for product distribution and sales. TITLE TO PROPERTIES The Company believes it has satisfactory title to its properties in accordance with standards generally accepted in the energy industry, subject to such exceptions which, in the opinion of the Company, would not have a material adverse effect on the use or value of said properties. The operating agreements for certain of the Company's natural gas processing plants and fractionation facilities grant a preferential purchase right to the plant owners in the event that any owner desires to sell its interest. Such agreements may also require the consent of a certain percentage of owners before rights under such agreements can be transferred. The Company is subject, as a plant owner under such agreements, to all such restrictions on transfer of its interest. In a few instances, the Company has granted rights of first refusal with respect to any future sale of certain assets. 19 Certain of the Company's power generation assets are subject to rights of first refusal or consent requirements with the Company's partners or power purchasers which restrict the transfer of interests in the facilities. Substantially all of Dynegy's gathering and transmission lines are constructed on rights-of-way granted by the apparent record owners of such property. In some instances, land over which rights-of-way have been obtained may be subject to prior liens that have not been subordinated to the right-of- way grants. Permits have been obtained from public authorities to cross over or under, or to lay facilities in or along, water courses, county roads, municipal streets and state highways, and in some instances, such permits are revocable at the election of the grantor. Permits have also been obtained from railroad companies to cross over or under lands or rights-of-way, many of which are also revocable at the grantor's election. Some such permits require annual or other periodic payments. In a few minor cases, property was purchased in fee. INDUSTRY SEGMENTS Segment financial information is included in Note 15 of Dynegy's consolidated financial statements contained elsewhere herein. Item 3. LEGAL PROCEEDINGS On April 17, 1997, Pacific Gas and Electric Company ("PG&E") filed a lawsuit in the Superior Court of the State of California, City and County of San Francisco, against Destec, Destec Holdings, Inc. and Destec Operating Company (wholly-owned subsidiaries of the Company now known respectively as Dynegy Power Corp., Dynegy Power Holdings, Inc. and Dynegy Operating Company) as well as against San Joaquin CoGen Limited ("San Joaquin" or the "Partnership") and its general partners (collectively the "Dynegy Defendants"). Dynegy Power Corp. and its affiliates now own all of the partnership interests in the Partnership as a result of the purchase of the interests of the two outside partners in the Partnership. In the lawsuit, PG&E asserts claims and alleges unspecified damages for fraud, negligent misrepresentation, unfair business practices, breach of contract and breach of the implied covenant of good faith and fair dealing. PG&E alleges that due to the insufficient use of steam by San Joaquin's steam host, the Partnership did not qualify as a cogenerator pursuant to the California Public Utilities Code ("CPUC") Section 218.5, and thus was not entitled under CPUC Section 454.4 to the discount the Partnership received under gas transportation agreements entered into between PG&E and San Joaquin in 1989, 1991, 1993 and 1995. All of PG&E's claims in this suit arise out of the Partnership's alleged failure to comply with CPUC Section 218.5. The defendants filed a response to the suit on May 15, 1997. On October 20, 1997, PG&E named Libbey-Owens-Ford ("LOF"), the Partnership's steam host, as an additional defendant in the action. On February 23, 1998, PG&E served its Second Amended Complaint on all defendants. On March 30, 1998, the defendants filed their response to PG&E's Second Amended Complaint, denying PG&E's allegations and alleging certain counterclaims against PG&E. By Order dated July 20, 1998, the court dismissed certain of defendants' counterclaims against PG&E, and abated certain others, pending resolution by the CPUC. The trial date is currently June 15, 1999. The Partnership has previously advised the FERC of PG&E's claims, and stated that it would submit any appropriate filings upon completion of its investigation. If the facility was found not to have satisfied the California cogeneration facility standards, there is a strong likelihood that it would also fail to satisfy the more stringent federal standards. In accordance with the terms of a Protective Order entered into by the parties at the commencement of the litigation, PG&E has notified San Joaquin that it may make a FERC filing seeking damages from San Joaquin and decertification of its status as a qualifying facility under the federal standards. Under FERC precedent, if the San Joaquin facility were found not to have been a qualifying facility, San Joaquin could be required to refund to PG&E payments it received pursuant to the Power Purchase Agreement in excess of PG&E's short-term energy costs during the period of non-compliance, plus interest. In the event the court or FERC were to determine that San Joaquin is liable to PG&E under the Gas Transportation Agreement or Power Purchase Agreement due to LOF's failure to use sufficient quantities of steam, San Joaquin will seek to recover such amounts from LOF under the terms of the Steam Purchase Agreement between San Joaquin and LOF. The parties have been actively engaged in settlement discussions, which resulted in the execution of a Termination and Settlement Agreement between PG&E and the Dynegy Defendants on March 9, 1999 (the "Settlement Agreement"). The Settlement Agreement provides for, upon the receipt of CPUC approval, a dismissal with prejudice of PG&E's claims against the Dynegy Defendants, a release by PG&E of all claims relative to FERC matters and a termination of the San Joaquin power purchase agreement as of December 31, 1999, whereupon the San Joaquin facility will continue to operate as a merchant plant. The Dynegy Defendants will seek to recover from LOF any losses resulting from the settlement with PG&E. However, if the settlement is not ultimately concluded, the Dynegy Defendants will seek to recover from LOF any losses or amounts for which it may be found liable. Further, the Company's subsidiaries intend to continue to vigorously defend this action. In the opinion of management, the ultimate resolution of this lawsuit will not have a material adverse effect on the Company's financial position or results of operations. 20 On March 24, 1995, Southern California Gas Company ("SOCAL") filed a lawsuit in the Superior Court of the State of California for the County of Los Angeles, against Destec, Destec Holdings and Destec Gas Services, Inc. (now known respectively as Dynegy Power Corp., Dynegy Holdings, Inc. and Dynegy Gas Services, Inc.), wholly-owned direct and indirect subsidiaries of the Company (collectively, the "Defendants"), as well as against Chalk Cliff Limited and McKittrick Limited (collectively, the "Partnerships"). The Company owns an indirect 50 percent limited partnership interest in McKittrick Limited, and Chalk Cliff Limited is now wholly owned by subsidiaries of the Company through the purchase of the interests of Dominion Energy, Inc. All general partners of the Partnerships are also named defendants. The lawsuit alleged breach of contract against the Partnerships and their respective general partners, and interference and conspiracy to interfere with contracts against the Defendants. The breach of contract claims arose out of the "transport-or-pay" provisions of the gas transportation service agreements between the Partnerships and SOCAL. SOCAL sought damages from the Partnerships for past damages and anticipatory breach damages in an amount equal to approximately $31,000,000. On October 24, 1997, the Court granted SOCAL's Motion for Summary Judgment relating to the breach of contract causes of action against the Partnerships and their respective general partners, and requested that SOCAL submit a proposed order consistent with that ruling for the Court's signature. On November 21, 1997, the Partnerships filed for voluntary Chapter 11 bankruptcy protection in the Eastern District of California. Normal business operations by the Partnerships continued throughout the course of these reorganization proceedings. On January 12, 1998, the Court entered a Final Order that (a) severed out the Partnerships due to their Chapter 11 bankruptcy filings, (b) included a finding of contract liability against the Defendants, (c) dismissed the tortious interference claims against the Defendants, and (d) assessed damages in an aggregate amount of approximately $31,000,000. On the same day, the Defendants filed their Notice of Appeal, and posted a security bond with the Second Appellate District in Los Angeles based on the lack of allegations made or proven by SOCAL which support holding those entities liable in contract. On March 11, 1998, the Partnerships and their respective general partners filed Notices of Appeal with respect to certain findings of fact in the Court's January 12, 1998 Final Order that were adverse to those defendants. On or about April 15, 1998, the Court entered a final judgment against the Partnerships themselves in recognition of the lifting of the automatic stay against those entities by the Bankruptcy Court. The Partnerships filed their appeal of that final judgment on June 4, 1998. On October 21, 1998, the Bankruptcy Court dismissed the voluntary bankruptcy filings of the Partnerships and their respective lenders thereafter notified each of the Partnerships of the occurrences of an Event of Default under the Partnerships' respective credit agreements due to the existence of the SOCAL judgment against them, and have instituted foreclosure proceedings as to the projects. Additionally, receivers were named by the lenders and approved by the Court for each of the projects. In early December 1998, the defendants filed their opening appellate briefs in the appeal of the Court's final judgment. On February 23, 1999, the Court granted a motion by SOCAL to amend the Court's final judgment to include a finding that Dynegy Power Corp. is the alter ego of the Partnerships and their respective general partners. Dynegy Power Corp. will appeal the Court's ruling, and will vigorously defend SOCAL's claims. The PG&E and SOCAL litigations represent pre-acquisition contingencies acquired by the Company in the Destec Acquisition. In a related matter, Chalk Cliff and San Joaquin have each guaranteed the obligations of the other partnership, represented by the project financing loans used to construct the power generation facilities owned by the respective Partnerships. In the opinion of management, the election by the lender of its option under the terms of such arrangements would not have a material adverse effect on the Company's financial position or results of operations. On August 3, 1998, Modesto Irrigation District ("MID") filed a lawsuit against PG&E and Destec in federal court for the Northern District of California, San Francisco division. The lawsuit alleges violation of federal and state antitrust laws and breach of contract against Destec. The allegations are related to a power sale and purchase arrangement in the city of Pittsburg, CA. MID seeks actual damages from PG&E and Destec in amounts not less than $25 million. MID also seeks a trebling of any portion of damages related to its antitrust claims. By order dated February 2, 1999, the federal District Court dismissed MID's state and federal antitrust claims against PG&E and Destec; however, the Court granted MID leave of thirty days to amend its complaint to state an antitrust cause of action. On March 3, 1999, MID filed an amended complaint recasting its federal and state antitrust claims against PG&E and Destec and restating its breach of contract claim against Destec. Dynegy believes the allegations made by MID are meritless and will continue to vigorously defend MID's claims. In the opinion of management, the amount of ultimate liability with respect to these actions will not have a material adverse effect on the financial position or results of operations of the Company. The Company assumed liability for various claims and litigation in connection with the Chevron Combination, the Trident Combination, the Destec Acquisition and in connection with the acquisition of certain gas processing and gathering facilities from Mesa Operating Limited Partnership. The Company believes, based on its review of these matters and consultation with outside legal counsel, that the ultimate resolution of such items will not have a material adverse effect on the Company's financial position or results of operations. Further, the Company is subject to various legal proceedings and claims, which arise in the normal course of business. In the opinion of management, the amount of ultimate liability with 21 respect to these actions will not have a material adverse effect on the financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's $0.01 par value common stock ("Common Stock") is listed and traded on the New York Stock Exchange under the ticker symbol "DYN". The number of stockholders of record of the Common Stock as of March 24, 1999, was 290. The following table sets forth the high and low closing prices for transactions involving the Company's Common Stock for each calendar quarter, as reported on the New York Stock Exchange Composite Tape and related dividends paid per common share during such periods. Summary of Dynegy's Common Stock Price and Dividend Payments High Low Dividend ------------------------------------------ 1998: Fourth Quarter $15.250 $10.250 $0.0125 Third Quarter 14.063 9.563 0.0125 Second Quarter 15.375 12.500 0.0125 First Quarter 17.250 14.625 0.0125 1997: Fourth Quarter $19.875 $16.000 $0.0125 Third Quarter 17.750 14.875 0.0125 Second Quarter 19.625 15.500 0.0125 First Quarter 24.000 15.375 0.0125 ========================================================================= The holders of the Common Stock are entitled to receive dividends if, when and as declared by the Board of Directors of the Company out of funds legally available therefor. Consistent with the Board of Directors' intent to establish a policy of declaring quarterly cash dividends, a cash dividend of $0.0125 per share was declared and paid in each quarter during 1998 and 1997. The holders of the Series A Preferred Stock are entitled to receive dividends or distributions equal per share in amount and kind to any dividend or distribution payable on shares of the Company's common stock, when and as the same are declared by the Company's Board of Directors. Accordingly, the Company also paid quarterly cash dividends on its Series A Participating Preferred Stock of $0.0125 per share, or $0.05 per share on an annual basis. 22 ITEM 6. SELECTED FINANCIAL DATA The selected financial information presented below was derived from, and is qualified by reference to, the Consolidated Financial Statements of the Company, including the Notes thereto, contained elsewhere herein. The selected financial information should be read in conjunction with the Consolidated Financial Statements and related Notes and Management's Discussion and Analysis of Financial Condition and Results of Operations.
DYNEGY'S SELECTED FINANCIAL DATA Year Ended December 31, -------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------------------------------------------------------------------------------- ($ in thousands, except per share data) STATEMENT OF OPERATIONS DATA (1) : Revenues $14,257,997 $13,378,380 $7,260,202 $3,665,946 $3,237,843 Operating margin 428,687 385,294 369,500 194,660 99,126 General and administrative expenses 185,708 149,344 100,032 68,057 47,817 Depreciation and amortization expense 113,202 104,391 71,676 44,913 8,378 Asset impairment, abandonment Severance and other charges 9,644 275,000 --- --- --- Net income (loss) (3) $ 108,353 $ (102,485) $ 113,322 $ 92,705 $ 42,101 Earnings (loss) per share (4) $0.66 $(0.68) $0.83 $0.82 n/a Pro forma earnings per share (4) n/a n/a n/a $0.40 $0.28 Shares outstanding 164,605 150,653 136,099 113,176 97,804 CASH FLOW DATA: Cash flows from operating activities $ 250,780 $ 278,589 $ (30,954) $ 90,648 $ 17,170 Cash flows from investment activities (295,082) (510,735) (111,140) (310,623) (38,376) Cash flows from financing activities 49,622 204,984 176,037 221,022 18,959 OTHER FINANCIAL DATA: EBITDA (5) $ 363,517 $ 291,899 $ 289,023 $ 142,538 $ 57,716 Dividends or distributions to partners, net 7,988 7,925 6,740 9,253 14,041 Capital expenditures, acquisitions And investments (6) 478,464 1,034,026 859,047 979,603 47,014 ================================================================================================================================= December 31, -------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------------------------------------------------------------------------------- ($ in thousands) BALANCE SHEET DATA (2) : Current assets $ 2,117,241 $ 2,018,780 $1,936,721 $ 762,939 $ 445,782 Current liabilities 2,026,323 1,753,094 1,548,987 705,674 404,144 Property and equipment, net 1,932,107 1,521,576 1,691,379 948,511 114,062 Total assets 5,264,237 4,516,903 4,186,810 1,875,252 645,471 Long-term debt 1,046,890 1,002,054 988,597 522,764 33,000 Total equity 1,128,063 1,019,125 1,116,733 552,380 152,213 =================================================================================================================================
(1) The Destec Acquisition was accounted for as an acquisition of a business in accordance with the purchase method of accounting and the results of operations attributed to the acquired business are included in the Company's financial statements and operating statistics effective July 1, 1997. The Chevron Combination was accounted for as an acquisition of assets under the purchase method of accounting and the results of operations attributed to the acquired assets are included in the Company's financial statements and operating statistics effective September 1, 1996. The Trident Combination was accounted for as an acquisition of a business in accordance with the purchase method of accounting and the results of operations attributed to the acquired business are included in the Company's financial statements and operating statistics effective March 1, 1995. (2) The Destec Acquisition and the Chevron and Trident Combinations were each accounted for under the purchase method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the effective dates of each transaction. The effective dates of the Destec Acquisition, Chevron Combination and Trident Combination were June 30, 1997, September 1, 1996 and March 1, 1995, respectively. (3) Net income (loss) does not include a provision for federal income taxes, other than minimal amounts on the taxable income of Clearinghouse's corporate subsidiaries, for the year ended December 31, 1994. (4) Earnings (loss) per share are computed in accordance with provisions of Statement of Financial Accounting Standard No. 128, "Earnings Per Share", for each of the years ended December 31, 1998, 1997, 1996 and 1995, respectively. Pro forma earnings per share for each of the years ended December 31, 23 1995 and 1994, respectively, are based on reported net income for the period adjusted for the incremental statutory federal and state income taxes that would have been provided had Clearinghouse been a taxpaying entity prior to the Trident Combination. The pro forma earnings per share computation for the year ended December 31, 1995, eliminates the effect of a one-time $45.7 million income tax benefit associated with the Trident Combination. The weighted average shares outstanding for the year ended December 31, 1995, is based on the weighted average number of common shares outstanding plus the common stock equivalents that would arise from the exercise of outstanding options or warrants, when dilutive. Pro forma weighted average shares outstanding of 97.8 million shares for the year ended December 31, 1994, gives effect to the terms of the Trident Combination and the common stock equivalent shares outstanding as of the effective date of the Trident Combination assuming a common stock market price of $12 in all periods. (5) Earnings before interest, taxes, depreciation and amortization ("EBITDA") is presented as a measure of the Company's ability to service its debt and to make capital expenditures. It is not a measure of operating results and is not presented in the Consolidated Financial Statements. The 1997 amount includes the non-cash portion of items associated with the $275 million impairment and abandonment charge. (6) Includes all value assigned the assets acquired in various business and asset acquisitions. The 1997 amount is before reduction for value received upon sale of Destec's foreign and non-strategic assets of approximately $735 million. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL COMPANY PROFILE Dynegy is a leading provider of energy products and services in North American and the United Kingdom. Products marketed by the Company's wholesale operations include natural gas, electricity, coal, natural gas liquids, crude oil, liquid petroleum gas and related services. The Company's wholesale marketing operations are supported by ownership or control of an extensive asset base and transportation network that includes unregulated power generation, gas and liquids storage capacity, gas, power and liquids transportation capacity and gas gathering, processing and fractionation assets. The critical mass achieved through the combination of a large scale energy marketing operation with strategically located assets which augment the marketing efforts affords the Company the ability to offer innovative, value-creating energy solutions to its customers. From inception of operations in 1984 until 1990, Clearinghouse limited its activities primarily to natural gas marketing. Starting in 1990, Clearinghouse began expanding its core business operations through acquisitions and strategic alliances resulting in the formation of a mid-stream energy asset business and establishing energy marketing operations in both Canada and the United Kingdom. The Company initiated electric power marketing operations in February 1994 in order to exploit opportunities created by the deregulation of the domestic electric power industry. Effective March 1, 1995, Clearinghouse and Holding, a fully integrated natural gas liquids company, merged and the combined entity was renamed NGC. On August 31, 1996, NGC completed a strategic combination with Chevron whereby substantially all of Chevron's mid-stream assets were merged with NGC. Effective July 1, 1997, NGC acquired Destec, a leading independent power producer. During 1998, the Company changed its name to Dynegy Inc. in order to reflect its evolution from a natural gas marketing company to an energy services company capable of meeting the growing demands and diverse challenges of the dynamic energy market of the 21st Century. BUSINESS SEGMENTS Dynegy's operations are divided into two segments: the Wholesale Gas and Power and Liquids segments. The Wholesale Gas and Power segment is actively engaged in value creation through marketing and trading of natural gas, power and coal and the generation of electricity principally under the name Dynegy Marketing and Trade. The Liquids segment consists of the North American mid- stream liquids operations, as well as the international liquefied petroleum gas transportation and natural gas liquids marketing operations located in Houston and London, and certain other businesses. The North American mid-stream liquids operations are actively engaged in the gathering and processing of natural gas and the transportation, fractionation and storage of NGLs. The Liquids segment operates principally under the name Dynegy Mid-Stream Services. 24 RECENT DEVELOPMENTS During 1998, Dynegy successfully executed key operating and business strategies that management believes provide impetus for financial growth in 1999 and beyond. Key accomplishments during the period, which are more fully described elsewhere herein, included: . Expansion of ownership or control of power generating assets and infrastructure; . Formation of additional regional retail energy marketing alliances in the United States; . Formation of asset management and marketing alliances with electric utilities, municipalities and others; . Enhancement of unit margins through selective disposition of marginally profitable sales volumes; . Continued rationalization of the Company's natural gas liquids businesses through formation of joint ventures, asset consolidations, discrete asset dispositions and strategic cost efficiency and reduction measures; . Implementation of "just-in-time" controlled inventory management techniques; . Sales of non-strategic assets and operations; . Implementation of technology infrastructure improvements intended to provide the Company with state-of-the-art business and financial software applications; and . Continued restructuring of the Company's long-term debt portfolio. WHOLESALE GAS AND POWER SEGMENT - Dynegy expects to continue expanding its ownership or commercial control of strategic assets and generating capacity in selected major market areas through acquisitions, greenfield development and asset management agreements in order to leverage its marketing and trading capabilities. Execution of this strategy began with the acquisition of Destec in 1997 and has continued during 1998 and into 1999. During 1998, the Company and a partner, NRG Energy, Inc. ("NRG"), a wholly- owned subsidiary of Northern States Power Company, acquired two California-based gas-fired merchant plants known as Long Beach and El Segundo. These generation facilities have a combined gross capacity of over 1,500 megawatts, providing the Company with significant commercial flexibility in the recently deregulated California electricity market. Dynegy and NRG each own a 50 percent interest in these facilities. Late in 1998, the Company and NRG announced the acquisition of the Encina power plant and certain other assets representing over 1,200 megawatts of additional generation capacity located in the San Diego, California area. The transaction is expected to close during the first half of 1999 and Dynegy will own a 50 percent interest in the special purpose entities that are acquiring the assets. Dynegy will provide fuel procurement, power marketing and asset management services for these ventures, while NRG will be responsible for operation of the facilities. In addition, during the year, Dynegy increased its ownership interest in certain other California based Qualifying Facilities. The Company is in the process of constructing two projects in the U.S., one in North Carolina and one near Chicago, Illinois. The North Carolina project is an 800 megawatt dual fuel fired facility that is expected to be operational by mid-year 2000 and is currently wholly owned by the Company. The Illinois facility is a 250 megawatt gas-fired merchant plant designed to assist in reducing power system congestion induced by peak electricity demands in the Midwest. The Illinois facility is expected to be operational in the summer of 1999. Dynegy currently owns 100 percent of this venture, but intends to divest 50 percent of its ownership interest in the venture in 1999. The Company has also announced its intent to expand the capacity of its Lyondell power generation facility by 155 megawatts in order to increase its capability of meeting peak demands in the Texas power markets. The expansion is anticipated to be operational in June 2000. Execution of the Company's retail marketing strategy expanded during 1998 with the addition of two new retail marketing alliances, one in the Southeast and one in the Northern Plains. These alliances expand Dynegy's retail presence to a significant part of the Eastern U.S. and in Canada. The Company is continuing to pursue additional alliance partners in order to achieve its goal of forming a North American network of regional retail energy marketers. During 1998, Dynegy consummated several agreements to manage the wholesale power, natural gas supply, transportation and storage needs for numerous municipalities, utilities and other similar entities. These arrangements typically represent full-service energy supply and asset management agreements requiring Dynegy to assure all energy requirements, as dictated by the specific agreement, as well as requiring Dynegy to manage firm transportation capacity and firm storage capacity. In addition, Dynegy and Florida Power Corporation, a Florida Progress Corporation company located in St. Petersburg, Florida, agreed to form a power marketing alliance that will operate in the U.S. wholesale electric and natural gas markets. The alliance created a commercial relationship between a power marketer and a utility focused on developing 25 wholesale energy markets in Florida and other regions. These examples represent execution of Dynegy's goal to achieve commercial control over physical assets in order to optimize returns, to both Dynegy and our customers. During 1998, the Company eliminated from its wholesale marketing customer base identified non-strategic or marginally profitable contracts and arrangements. As a result, the Company's growth in and market share of U.S. gas marketing volumes decreased during the period. However, this strategy resulted in higher average per unit margins achieved by the Company during 1998. Management will continue to stress the quality of its customer base and service offering over sales volumes in order to maximize profitability. LIQUIDS SEGMENT - During 1998, the Liquids segment continued execution of the restructuring and rationalization of its operations that were begun in 1997. Despite uncooperative market conditions, the segment's businesses were able to achieve efficiency improvements and cost reductions that enhance its competitive position in the marketplace. These businesses increased their focus on extracting fee income throughout the value chain, unbundling services and leveraging off the Company's commercial skills and relationships. In addition, the segment businesses focused efforts on re-negotiating or restructuring marginally profitable contractual arrangements in order to position these businesses for profitable growth. Finally, the segment continued to invest in strategically located mid-stream assets in order to advance existing commercial advantages or to leverage off identified economies of scale. The intent of these initiatives is to mitigate the variability commodity prices have on the operating results of the segment, as well as to position the segment's businesses to take full advantage of improvements in market conditions when they occur. During the period, the Company completed the plant consolidations that were identified and accrued for in 1997. Additionally, the Company sold three non- strategic gas processing facilities and formed a joint venture with Texaco that combined the natural gas processing operations of both companies in Southeast New Mexico and West Texas. The result of these activities was increased operating efficiencies and economies of scale that are intended to increase profitability through higher utilization, lower costs and improved performance. Also, during the year, Dynegy Canada Inc. acquired the Mazeppa and Gladys gas processing plants and associated gathering lines located in Alberta, Canada. The acquisition of these mid-stream assets represents the re-establishment of a Canadian asset base that will complement existing Canadian gas marketing and trading operations. The Company expanded its commercial capability in the Gulf Coast region through completion of construction of a 55,000 barrel per day fractionation facility near Lake Charles, Louisiana. The fractionator is capable of separating natural gas liquids into ethane, propane and a butane and natural gasoline mix. The facility is fed primarily from offshore production in the Gulf of Mexico and its products are primarily shipped through pipeline to customers in the petrochemical and refining industries in Lake Charles or to Mont Belvieu, Texas, for further refinement. Additionally, the commercial capability of the VESCO investment was enhanced by the contribution of a 300 MMcf/d cryogenic gas processing unit. In 1998, management of the Company's investment in NGL inventories was enhanced through implementation of a "just-in-time" controlled inventory process. The economic result of the improved management of NGL inventories reduced carrying costs and assisted in insulating the Company from commodity price risk resulting from the precipitous drop in NGL prices throughout most of the year. During the period, Dynegy sold the Ozark Gas Transmission System ("Ozark") to an affiliate of Oklahoma City-based Enogex Inc. for $55 million, realizing an after-tax gain of $17.1 million. TECHNOLOGY INFRASTRUCTURE ENHANCEMENTS - Dynegy has launched a technology infrastructure improvement initiative aimed at optimizing major business and financial processes at the Company. Using state-of-the-art technology and software applications, the project team is focused on process enhancements extending throughout the organization, linking initial price and market discovery with risk control, production, aggregation, distribution, cash settlement, accounting and financial statement recognition. DEBT PORTFOLIO RESTRUCTURING - During 1998, the Company retired certain high-coupon debt and renegotiated or refinanced other debt agreements with the intent of improving the financial flexibility of its debt portfolio, thereby reducing the overall cost of its indebtedness 26 and positioning the Company to manage its liquidity needs for the foreseeable future. Further discussion of the renegotiated or refinanced indebtedness is contained in the Liquidity and Capital Resources section of Item 7 of this Form 10-K and in the footnotes to the financial statements. The following is a description of the more significant retirements of indebtedness occurring during 1998, which impacted the restructuring of the Company's overall debt portfolio during the period. In February 1998, the Company delivered Notices of Redemption to the holders of its $65 million principal amount of 14% Senior Subordinated Notes and $105 million principal amount of 10.25% Subordinated Notes. On March 31, 1998 and April 15, 1998, the Company retired the Senior Subordinated Notes and the Subordinated Notes, respectively, pursuant to the redemption provisions contained in the respective indentures. Dynegy funded the aggregate redemption value of approximately $180 million through a public debt issuance. As part of the Chevron Combination, Dynegy assumed approximately $155.4 million payable to Chevron upon demand on or after August 31, 1998 (the "Chevron Note"). On August 31, 1998, the Chevron Note was retired, pursuant to the terms of the agreement, with funds provided through the sale of commercial paper. IMPACT OF PRICE FLUCTUATIONS Dynegy's operating results are impacted by commodity price, interest rate and foreign exchange rate fluctuations. The Company routinely enters into financial instrument contracts to hedge purchase and sale commitments, fuel requirements and inventories in its natural gas, natural gas liquids, crude oil, electricity and coal businesses in order to minimize the risk of market fluctuations. As a result of marketplace liquidity and other factors, the Company may, at times, be unable to fully hedge its portfolio for certain market risks. Dynegy also monitors its exposure to fluctuations in interest rates and foreign currency exchange rates and may execute swaps, forward-exchange contracts or other financial instruments to manage these exposures. Operating margins in the Wholesale Gas and Power segment are separated into three integrated component businesses: wholesale gas marketing, wholesale power marketing and power generation. Operating margins earned by wholesale gas and power marketing, exclusive of risk-management activities, are relatively insensitive to commodity price fluctuations since most of the purchase and sales contracts do not contain fixed-price provisions. Generally, prices contained in these contracts are tied to a current spot or index price and, therefore, adjust directionally with changes in overall market conditions. However, market price fluctuations for natural gas and electricity can have a significant impact on the operating margin derived from risk-management activities in these businesses. Dynegy generally attempts to balance its fixed-price physical and financial purchase and sales commitments in terms of contract volumes, and the timing of performance and delivery obligations. However, the Company may, at times, have a bias in the market, within established guidelines, resulting from management of its portfolio. To the extent a net open position exists, fluctuating commodity market prices can impact Dynegy's financial position or results of operations, either favorably or unfavorably. Further, differences in the comprehensive methods of accounting for North American fixed-price natural gas transactions, which are accounted for under the mark-to-market method, and natural gas marketing transactions in the U.K. and power marketing transactions, which are both accounted for under accrual accounting, create differences in the timing of the recognition of such commodity price movements. The net open positions are actively managed, and the impact of changing prices on the Company's financial condition at a point in time is not necessarily indicative of the impact of price movements throughout the year. Fuel costs, principally natural gas, represent the primary variable cost impacting margins at the Company's power generating facilities. Historically, operating margins have been relatively insensitive to commodity price fluctuations since most of this business's purchase and sales contracts contain variable power sales contract features tied to a current spot or index natural gas price, allowing revenues to adjust directionally with changes in natural gas prices. However, as the Company's investment in merchant generation capacity expands, changes in, and the relationship between natural gas and electricity prices may impact the financial performance and cash flow related to its portfolio of merchant power generation assets. At December 31, 1998, a $0.25 increase in the price of natural gas would have increased operating margin of the Wholesale Gas and Power segment by approximately $2.2 million, and a $0.25 decrease in the price of natural gas would have decreased operating margin by approximately $1.9 million. The impact of the $0.25 price movements referred to above are before application of market reserves, which would likely reduce the after-tax earnings impact of these price movements. Operating margins associated with the Liquids segment's natural gas gathering, processing and fractionation activities are very sensitive to changes in natural gas liquids prices and the availability of inlet volumes. The impact from changes in natural gas liquids prices results principally from the nature of contractual terms under which natural gas is 27 processed and products are sold. In addition, certain of the Liquids Businesses' processing plant assets are impacted by changes in, and the relationship between, natural gas and natural gas liquids prices which, in turn influences the volumes of gas processed. Commodity price fluctuations may also affect the operating margins derived from the Company's natural gas liquid and crude oil marketing businesses. Based upon current levels of natural gas processing activities and industry fundamentals, the estimated impact on annual operating margins of each one-cent movement in the annual average price of natural gas liquids approximates $8 to $10 million. The availability of inlet volumes directly affects the utilization and profitability of the segment's businesses throughout the Liquids Value Chain. The acquisition of inlet volumes is highly competitive and the availability of such volumes to industry-wide participants is also impacted by price variability. Unilateral decisions made by producers to shut-in production or otherwise curtail workovers, reduce well maintenance activities and/or delay or cancel drilling activities, as a result of depressed commodity prices or other factors, negatively affects production available to the entire mid-stream industry. Because such decisions are based upon the pricing environment at any particular time, management cannot predict with precision the impact that such decisions may have on its business. SEASONALITY Dynegy's revenue and operating margin are subject to fluctuations during the year, primarily due to the impact certain seasonal factors have on sales volumes and the prices of natural gas, electricity and natural gas liquids. Natural gas sales volumes and operating margin are typically higher in the winter months than in the summer months, reflecting increased demand due to greater heating requirements and, typically, higher natural gas prices. Conversely, power marketing operations are typically impacted by higher demand and commodity price volatility during the summer cooling season. Consistent with power marketing, the Company's electricity generating facilities generally experience peak demand during the summer cooling season, particularly for merchant plant generating facilities. The Liquids Businesses are also subject to seasonal factors; however, such factors typically have a greater impact on sales prices than on sales volumes. Natural gas liquids prices typically increase during the winter season due to greater heating requirements. The Company's wholesale propane business is seasonally weighted in terms of volume and price, consistent with the trend in the Company's natural gas operations, as a result of greater demand for crop-drying and space-heating requirements in the fall and winter months. EFFECT OF INFLATION Although Dynegy's operations are affected by general economic trends, management does not believe inflation has had a material effect on the Company's results of operations. LIQUIDITY AND CAPITAL RESOURCES The Company's business strategy has historically focused on acquisitions or construction of core operating facilities in order to capture significant synergies existing among these types of assets and Dynegy's natural gas, power and natural gas liquids marketing businesses. For the foreseeable future, the Company's primary focus will be the acquisition and/or construction of power generating assets that will enable the Company to fully realize the Merchant Leverage Effect of commercialization of these generating assets. The Company's energy convergence strategies are focused on marketing, trading and arbitrage opportunities involving natural gas and power, centered around the control and optimization of Btu conversion capacity within the wholesale gas and power businesses. Dynegy has historically relied upon operating cash flow and borrowings from a combination of commercial paper issuances, money market lines of credit, corporate credit agreements and various public debt issuances for its liquidity and capital resource requirements. The following briefly describes the terms of these arrangements. COMMERCIAL PAPER AND MONEY MARKET LINES OF CREDIT The Company uses commercial paper proceeds and borrowings under uncommitted money market lines of credit for general corporate purposes, including short- term working capital requirements. The Company maintains a commercial paper program for amounts up to $800 million, as supported by its corporate credit agreements. At December 31, 1998, approximately $519 million of commercial paper was outstanding and $20 million was outstanding under existing money market lines of credit. CORPORATE CREDIT AGREEMENTS Dynegy's corporate credit agreements are comprised of a $400 million, five- year revolving credit agreement maturing in May 2003, and a $400 million, 364- day revolving credit agreement maturing in May 1999. Both agreements 28 provide funding for working capital, letters of credit and other general corporate expenditures. The Company maintains an additional $240 million, 364- day revolving credit agreement having a current maturity date of December 17, 1999. This facility also provides funding for general corporate purposes. At December 31, 1998, letters of credit and borrowings under the corporate credit agreements aggregated $27 million and, after consideration of the outstanding commercial paper, aggregate unused borrowing capacity under the corporate credit agreements approximated $495 million. CANADIAN CREDIT FACILITY In November 1998, an indirect wholly-owned Canadian subsidiary of the Company entered into a $60 million, two-year revolving credit facility maturing in November 2000. Borrowings under this agreement may be used for general corporate purposes. At December 31, 1998, $40 million was outstanding under this agreement. PUBLIC DEBT The Company has three separate public debt issues aggregating $500 million, which mature in 2005, 2018 and 2026, respectively. Net proceeds derived from these issues were used to reduce outstanding borrowings under credit arrangements existing at the date of each respective issuance. DEVELOPMENT PROJECT FINANCING The consolidated long-term debt balance includes three notes aggregating $103.1 million having recourse only to the assets of three power generation projects. Each of the three notes represents a fifteen-year term loan obligation payable in semi-annual installments of principal plus accrued interest. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEFERRABLE INTEREST DEBENTURES NGC Corporation Capital Trust I ("Trust"), a wholly owned subsidiary of Dynegy, issued in a private transaction $200 million aggregate liquidation amount of 8.316% Subordinated Capital Income Securities (referred to herein as "Securities") representing preferred undivided beneficial interests in the assets of the Trust. The Trust invested the proceeds from the issuance of the Trust Securities in an equivalent amount of 8.316% Subordinated Debentures ("Subordinated Debentures") of the Company. The sole assets of the Trust are the Subordinated Debentures. Following the issuance of the Securities, the Trust completed an exchange offer through which all of the outstanding Securities were exchanged by the holders thereof for registered securities having substantially the same rights and obligations. OTHER MATTERS STOCKHOLDER DIVESTITURE. In August 1998, the Company announced that NOVA had given notice of its intent to divest its 25.4 percent stake in Dynegy, representing approximately 38.8 million common shares. Chevron and BG each also currently own 25.4 percent of the outstanding common shares of Dynegy and maintain certain preferential rights to purchase the common shares to be divested by NOVA pursuant to the shareholder's agreement between BG, Chevron and NOVA dated May 22, 1996. The uncertainty surrounding the change in ownership has temporarily reduced the Company's financial flexibility by limiting its access to certain capital market sectors. As a result, the Company's ability to finance the full execution of its business strategy, as discussed elsewhere herein, may be diminished if resolution of NOVA's divestiture is prolonged or is concluded in a manner which negatively impacts Dynegy's stock price. Dynegy's management and Board of Directors are actively pursuing alternatives to resolve this issue in a timely manner. Management believes that the ultimate resolution of this issue will not have a material adverse impact on its operations or financial condition. STOCK OPTIONS. Employee stock option grants made from 1994 to 1998 will become exercisable during 1999 and 2000, respectively, resulting in the potential exercise of approximately 9.6 million options during that two-year period, at exercise prices ranging from $2.03 to $21.63. Other options currently granted under the Company's option plans will fully vest periodically and become exercisable through the year 2003 at prices ranging from $2.03 to $21.63. Grants made under the Company's option plans may be canceled under certain circumstances as provided in the plans. While the Company cannot predict the timing or the number of shares which may be issued upon the exercise of option grants by individual employees, the Company is pursuing a variety of alternatives to help assure an orderly distribution of shares which may become available to the market. 29 ACQUISITION AND CONSTRUCTION PROJECTS. Included in the 1999 budget is approximately $440 million committed to construction projects in progress, identified asset acquisitions, maintenance capital projects, environmental projects, technology infrastructure and software enhancements, contributions to equity investments and certain discretionary capital investment funds. The capital budget is subject to revision as unforeseen opportunities or circumstances arise. Funds committed in 1999 to announced acquisitions and significant construction projects and other capital investments are as follows: COMMITTED FUNDING FOR 1999 ACQUISITION AND CONSTRUCTION PROJECTS ESTIMATED PROJECTED FUNDING PROJECT IN-SERVICE DATE COMMITMENT - ------------------------------------------------------------------------------- ($ in thousands) Encina Acquisition Mid-Year 1999 $178,000 Rockingham Power Generation Plant Mid-Year 2000 60,000 Lyondell Expansion Mid-Year 2000 8,700 Maintenance Capital Various 73,000 Information Technology Infrastructure and Various 55,000 Software =============================================================================== COMMITMENTS. In conducting its operations, the Company routinely enters into agreements that commit future cash flow to the lease and or acquisition of assets used in its businesses. These commitments are typically associated with capital projects, reservation charges for storage and transportation capacity, office and equipment leases and other similar items. The terms of these agreements vary based on the nature and intent of each transaction. The following describes the more significant commitments outstanding at December 31, 1998. A subsidiary of the Company has entered into various binding agreements committing the Company to expend approximately $14 million for the acquisition of combustion turbine generators. Currently, other non-binding agreements are executed which could ultimately commit the Company to expend approximately $500 million in total over the next three years for the acquisition of turbine generators and related equipment. This equipment will be used in the construction of electricity generating capacity in selected sites throughout the U.S. A significant portion of the current commitment relates to agreements that include cancellation provisions providing for termination at Dynegy's option during the construction phase in exchange for variable penalty payments. In 1997, Dynegy received cash from a gas purchaser as an advance payment for future natural gas deliveries over a ten-year period ("Advance Agreement"). As a condition of the Advance Agreement, Dynegy entered into a natural gas swap with a third party under which Dynegy became a fixed-price payor on identical volumes to those to be delivered under the Advance Agreement at prices based on then current market rates. The cash payment was classified as an advance on the balance sheet and is ratably reduced as gas is delivered to the purchaser under the terms of the Advance Agreement. In addition, the purchaser pays a monthly fee to Dynegy associated with delivered volumes. The Advance Agreement contains certain non-performance penalties that impact both parties and as a condition precedent, Dynegy purchased a surety bond in support of its obligations under the Advance Agreement. For a two-year period beginning January 1, 1998, the Company contracted for 1.3 billion cubic feet per day of firm transportation capacity to California on the El Paso Natural Gas pipeline system. Pursuant to this arrangement, Dynegy is obligated to pay a minimum of $38 million of reservation charges during 1999. A wholly-owned subsidiary of the Company leases certain power generating assets under agreements that are classified as operating leases. These agreements had aggregate future minimum lease payments of approximately $410 million at December 31, 1998. DIVIDEND REQUIREMENTS. Holders of the Company's Common Stock are entitled to receive dividends if, when and as declared by the Board of Directors of the Company out of funds legally available therefor. Currently, aggregate cash dividends of $0.05 per share on the outstanding Common Stock are expected to be declared by the Board of Directors and paid by the Company during 1999. Accordingly, the Company also anticipates payment of dividends during 1999 on the outstanding shares of its Series A Participating Preferred Stock of $0.05 per share on an annual basis. 30 Stock Repurchase Plan. The Company has a stock repurchase program, approved by the Board of Directors, that allows it to repurchase, from time to time, up to 1.6 million shares of common stock in open market transactions. The timing and number of shares ultimately repurchased will depend upon market conditions and consideration of alternative investments. Pursuant to this program, the Company has acquired 1,200,700 shares at a total cost of $17.4 million, or $14.50 per share on a weighted average cost basis, through December 31, 1998. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES. The Company is exposed to certain market risks inherent in the Company's financial instruments, which arise from transactions entered into in the normal course of business. The Company routinely enters into financial instrument contracts to hedge purchase and sale commitments, fuel requirements and inventories in its natural gas, natural gas liquids, crude oil, electricity and coal businesses in order to minimize the risk of market fluctuations. Dynegy also monitors its exposure to fluctuations in interest rates and foreign currency exchange rates and may execute swaps, forward-exchange contracts or other financial instruments to hedge and manage these exposures. The absolute notional contract amounts associated with commodity risk-management, interest rate and forward exchange contracts, respectively, were as follows:
ABSOLUTE NOTIONAL CONTRACT AMOUNTS DECEMBER 31, --------------------------------------------- 1998 1997 1996 --------------------------------------------- Natural Gas (Trillion Cubic Feet) 4.179 2.558 1.535 Electricity (Million Megawatt Hours) 1.835 2.244 --- Natural Gas Liquids (Million Barrels) 6.397 4.355 3.270 Crude Oil (Million Barrels) 18.800 14.920 2.034 Interest Rate Swaps (in thousands of US Dollars) $ 69,332 $180,000 $ --- Fixed Interest Rate Paid on Swaps 8.067 6.603 --- U.K. Pound Sterling (in thousands of US Dollars) $ 69,254 $ 74,638 $ --- Average U.K. Pound Sterling Contract Rate (in $ 1.6143 $ 1.5948 $ --- US Dollars) Canadian Dollar (in thousands of US Dollars) $268,307 $ 37,041 $ --- Average Canadian Dollar Contract Rate (in US $ 0.6710 $ 0.7240 $ --- Dollars) =============================================================================================
Cash-flow requirements for these commodity risk-management, interest rate and foreign exchange contracts were estimated based upon market prices in effect at December 31, 1998. Cash-flow requirements were as follows:
CASH FLOW REQUIREMENTS FOR RISK MANAGEMENT CONTRACTS 1999 2000 2001 2002 2003 BEYOND ---------------------------------------------------------------------------------------------- ($ IN THOUSANDS) Future estimated net inflows (outflows) based on year end market prices/rates $38,104 $(9,574) $(3,475) $(2,473) $ 180 $1,073 ======= ======= ======= ======= ===== ===========
Accounting Pronouncements. As a result of recent pronouncements issued by the Financial Accounting Standards Board and the Emerging Issues Task Force, the Company's comprehensive method of accounting for energy-related contracts and/or derivative instruments and hedging transactions is changing. Previously, only North American fixed-price natural gas transactions were recorded at fair value, net of future servicing costs and reserves as estimated by the Company. The Company does not anticipate that its current mark-to-market accounting for fixed-price natural gas contracts will be significantly affected by the adoption of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement No. 133") or by the Emerging Issues Task Force's conclusions in EITF 98-10, "Accounting for Energy Trading and Risk Management Activities" ("EITF 98-10"). However, provisions in Statement No. 133 and in EITF 98-10 will affect the accounting for other trading and marketing operations that are currently accounted for under the accrual method. Further, provisions in Statement No. 133 will affect the accounting for and disclosure of other contractual arrangements and operations of the Company. The Company is required to adopt the provisions of EITF 98-10 effective January 1, 1999. The cumulative effect of the change in accounting resulting from adoption of the provisions of EITF 98-10 is immaterial. The transition rules under Statement No. 133 provide for early adoption as of the beginning of any fiscal 31 quarter subsequent to June 15, 1998. Dynegy intends to adopt the provisions of Statement No. 133 within the timeframe and in accordance with the requirements provided by that statement. Management believes that the adoption of the provisions of these standards may affect the variability of future periodic results reported by Dynegy, as well as its competitors, as market conditions and resulting valuations change from time to time. Such earnings variability, if any, will likely result principally from valuation issues arising from imbalances between supply and demand created by illiquidity in certain commodity markets resulting from, among other things, a lack of mature trading and price discovery mechanisms, transmission and/or transportation constraints resulting from regulation or other issues in certain markets and the need for a representative number of market participants maintaining the financial liquidity and other resources necessary to compete effectively. Management will monitor exposure to these and other market and business risks and will adjust valuation factors accordingly as indicated by changing circumstances. Year 2000 Issues. The Company is continuing its analysis of the "Year 2000" issue, which arises from the use by certain computer hardware and software applications of two digits rather than four to define an applicable year. Such hardware and software may be incapable of appropriately recognizing the year 2000, the result of which could be system failures or miscalculations leading to disruptions in the Company's activities and operations. If the Company and/or its significant customers or suppliers fail to timely make necessary modifications and conversions, the Year 2000 issue could have a material adverse effect on Company operations and its financial position. The Company believes that its competitors face similar risks. Dynegy has established a corporate-wide project team to identify and rectify non-compliant hardware and software within its infrastructure. The Company has completed its inventory of corporate-wide imbedded systems issues as well as its inventory of corporate hardware and software applications. The Company is substantially complete with its inventorying of hardware and software infrastructure at remote locations. A final risk assessment, testing and remediation activity is ongoing and will be substantially underway on all of the Company's core systems and business applications at both corporate and field locations by the end of the first quarter 1999. It is expected that all core systems and business applications will be Year 2000 ready by September 1999. In addition, the Company is focusing assessment efforts to determine that major customers and suppliers are also Year 2000 ready. The project team is also formulating contingency plans to address alternatives for the Company should Year 2000 issues disrupt operations. As part of the plan, the Company is developing contingency plans that address essential aspects of the Year 2000 problem. The contingencies identified include: . Satisfactory remediation of all core systems and business applications is not executed by December 31, 1999; . System modifications and conversions instituted by significant customers or suppliers fail to satisfactorily remediate Year 2000 issues by December 31, 1999; and . Year 2000 issues remain unidentified by Dynegy, its industry partners or ancillary service providers, which disrupt operations of the Company. Dynegy's contingency plans are being designed to minimize any disruptions or other adverse effects resulting from Year 2000 incompatibilities regarding core systems and business applications and to facilitate the early identification and remediation of system problems that manifest themselves after December 31, 1999. In addition to software and hardware issues directly affecting commercial operations of the Company, the contingency plan addresses, for example, loss of electricity, telecommunications, building access, security and other factors. Nevertheless, there can be no absolute assurance that there will not be a material adverse effect on the Company if its efforts are delayed or are ineffective, if material issues remain unidentified or if third party entities do not convert or replace hardware and software applications in a timely manner and in a way that is compatible with the Company's hardware and software infrastructure. The Securities and Exchange Commission requires that public companies forecast the most reasonable likely worst-case Year 2000 scenario. In doing so, the Company assumed that its Year 2000 plan is ineffective. In reviewing a worst-case scenario, the Company contemplated issues that, although considered highly unlikely, must be contemplated in such a review. Issues contemplated in this review included total failure of financial and operational systems, total loss of supplies from third parties, total loss of transportation, storage and similar operational capabilities and widespread extended loss of utilities, building access and other similar items. Under this scenario, the Company would face substantial claims by third parties and loss of revenue and cash flow resulting from, among other things, service interruptions, the inability to meet contractual obligations and the inability to invoice or pay third parties timely and accurately. Further, such a disruption could affect the operational integrity of certain commercial assets, the result of which could have operational, safety and environmental implications. The Company is not able to quantify the financial effect of the worst case scenario described 32 above and will continue to actively monitor business conditions with the aim of assessing and quantifying material adverse effects, if any, that result or may result from the Year 2000 issue. Results of the review conducted to date indicate that the Company is unlikely to be burdened by a material event resulting from the Company's untimely resolution of Year 2000 issues. The potential costs and uncertainties associated with this review are dependent upon a number of factors, including legacy software and hardware configurations, planned information technology infrastructure enhancements and the availability of trained personnel. Aggregate current cost estimates for the entire Year 2000 project are projected to range between $8 and $10.5 million. Approximately $2 million of this amount was expended during 1998 related to this project. These cost estimates include costs for identification and remediation of Year 2000 issues. Such cost estimates are based on current available information and are subject to revision, either upward or downward, as the project matures and additional information becomes available. ENVIRONMENTAL MATTERS. Dynegy's operations are subject to extensive federal, state, provincial and local statutes, rules and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Compliance with these statutes, rules and regulations requires capital and operating expenditures including those related to monitoring and permitting at various operating facilities and the cost of remediation obligations. The Company's environmental expenditures have not been prohibitive in the past, but are anticipated to increase in the future with the trend toward stricter standards, greater regulation, more extensive permitting requirements and an increase in the number of assets operated by the Company subject to environmental regulation. Dynegy's aggregate expenditures for compliance with laws and regulations related to the discharge of materials into the environment or otherwise related to the protection of the environment approximated $9 million in 1998. Total environmental expenditures for both capital and operating maintenance and administrative costs are not expected to exceed $14 million in 1999. CONCLUSION The Company continues to believe that it will be able to meet all foreseeable cash requirements, including working capital, capital expenditures and debt service, from operating cash flow, supplemented by borrowings under its various credit facilities, if required. 33 RESULTS OF OPERATIONS The following table reflects certain operating and financial data for the Company's business segments for the years ended December 31, 1998, 1997 and 1996, respectively.
DYNEGY'S OPERATING AND FINANCIAL DATA Years Ended December 31, ------------------------------------------ 1998 1997 1996 ------------------------------------------ ($ in thousands) FINANCIAL CONTRIBUTION (1) (2): WHOLESALE GAS AND POWER - Natural Gas Marketing $115,895 $ 99,375 $100,243 UK Gas Marketing 14,164 3,917 --- Electric Power Marketing 42,816 4,526 3,379 Power Generation 63,400 18,987 --- -------- -------- -------- Total Wholesale Gas and Power Operating Margin 236,275 126,805 103,622 -------- -------- -------- Gas Marketing Investments 18,353 22,943 20,090 Electric Power Marketing Investments 509 518 606 Power Generation Investments 56,380 12,780 --- -------- -------- -------- Total Wholesale Gas and Power Equity Earnings 75,242 36,241 20,696 -------- -------- -------- TOTAL WHOLESALE GAS AND POWER FINANCIAL CONTRIBUTION 311,517 163,046 124,318 -------- -------- -------- LIQUIDS - Natural Gas Processing - Field Plants 73,478 159,710 124,054 Natural Gas Processing - Straddle Plants 7,786 30,097 42,198 Fractionation (7) 28,379 25,813 20,223 Natural Gas Liquids Marketing 53,641 22,639 48,355 Crude Oil Marketing 9,138 500 11,583 Natural Gas Gathering and Transmission 10,208 16,757 18,140 International LPG Sales 9,782 2,973 1,325 -------- -------- -------- Total Liquids Operating Margin 192,412 258,489 265,878 -------- -------- -------- Natural Gas Processing Investments 5,643 9,004 2,429 Fractionation Investments 3,741 6,624 3,360 Gathering and Transmission Investments 6,412 7,090 1,590 -------- -------- -------- Total Liquids Equity Earnings 15,796 22,718 7,379 -------- -------- -------- TOTAL LIQUIDS FINANCIAL CONTRIBUTION 208,208 281,207 273,257 -------- -------- -------- TOTAL FINANCIAL CONTRIBUTION $519,725 $444,253 $397,575 ======== ======== ======== CONSOLIDATED OPERATING MARGIN $428,687 $385,294 $369,500 CONSOLIDATED EQUITY EARNINGS 91,038 58,959 28,075 -------- -------- -------- TOTAL FINANCIAL CONTRIBUTION $519,725 $444,253 $397,575 ======== ======== ======== OPERATING STATISTICS (2) : Natural Gas Marketing (Bcf/d) - Domestic Sales Volumes (3) 5.9 6.1 4.3 Canadian Sales Volumes (4) 2.3 1.9 --- UK Sales Volumes (6) 0.7 0.2 --- -------- -------- -------- 8.9 8.2 4.3 ======== ======== ======== Electric Power Marketing - Million Megawatt Hours Sold 120.8 94.7 14.9 Power Generation (Million Megawatt Hours Generated) - Gross 15.9 7.2 --- Net 9.8 4.3 --- Natural Gas Liquids Processed (MBbls/d - Gross) - Field Plants 91.8 89.8 57.4 Straddle Plants 30.9 46.4 36.9 Fractionation - Barrels Received for Fractionation (MBbls/d) (7) 192.5 201.3 169.1 NGL Marketing - Sales Volumes (MBbls/d) 410.7 413.9 245.0 Crude Oil Marketing - Sales Volumes (MBbls/d) 239.6 168.3 106.0 Natural Gas Gathering and Transmission (MMcf/d) 0.3 0.4 0.3 International LPG Sales Volumes (MMBbls) (5) 26.7 33.5 1.7 ===================================================================================================================
34 (1) Financial contribution is defined by the Company as the sum of the segment's operating margin and equity earnings from unconsolidated affiliates. The Company considers this a key financial benchmark for its operations due to the significance of the Company's investments in unconsolidated affiliates as a component of overall results. During 1998, 1997 and 1996, the Company received cash dividends on these investments approximating $85 million, $64 million and $7 million, respectively. (2) The Destec acquisition was accounted for as an acquisition of a business in accordance with the purchase method of accounting and the results of operations attributed to the acquired business are included in the Company's financial statements and operating statistics effective July 1, 1997. The Chevron Combination was accounted for as an acquisition of assets under the purchase method of accounting and the results of operations attributed to the acquired assets are included in the Company's financial statements and operating statistics effective September 1, 1996. (3) Includes immaterial amounts of inter-company gas sales for all periods. (4) Represents volumes sold by Dynegy Canada, Inc. for the period from April 1, 1997 through December 31, 1997 and for the year ended December 31, 1998. Volumes sold by NCL prior to the reorganization are not comparable. (5) Includes 5.8 MMBbls of inter-company sales for the year ended December 31, 1997. A material amount of volumes sold in 1996 are inter-company sales volumes. (6) Represents volumes sold by Dynegy UK Ltd. for the years ended December 31, 1998 and 1997, respectively. Volumes sold by Accord prior to the reorganization are not comparable. (7) Effective January 1, 1997, the Company sold its interest in the Mont Belvieu I fractionator and in 1998 the Company reduced its interest in the Cedar Bayou Fractionator from 100 percent to 88 percent. THREE YEARS ENDED DECEMBER 31, 1998 For the year ended December 31, 1998, the Company realized net income of $108.4 million, or $0.66 per diluted share. This compares with a net loss of $102.5 million, or $0.68 per share, and net income of $113.3 million, or $0.83 per diluted share, in 1997 and 1996, respectively. The comparability of results period to period was impaired by the recognition of net non-recurring, after-tax gains totaling $10.8 million during 1998, net after-tax charges totaling $218.5 million recognized in 1997 and after-tax charges of $2.5 million recognized in 1996. In addition, the comparability of results for the three years is influenced by the Destec Acquisition that was effective July 1, 1997, and the Chevron Combination that was effective September 1, 1996. Revenues in each of the three years in the period ended December 31, 1998, totaled $14.3 billion, $13.4 billion and $7.3 billion, respectively. Operating cash flows totaled $250.8 million for the year ended December 31, 1998, compared with cash flows of $278.6 million in 1997 and a use of cash from operations during the 1996 period of $31.0 million. Non-recurring items in the current period relate to a $17.1 million after-tax gain on the sale of Ozark offset by a $6.3 million after-tax severance charge. The 1997 loss included one-time charges principally associated with the abandonment and impairment of certain operating and non-operating assets, inventory obsolescence and lower-of-cost-or-market writedowns, reserves for contingencies and other obligations, a charge for a hedging related loss and a charge associated with a change in the method of accounting for certain business process re-engineering and information technology transformation costs. The 1996 charge related to relocation of the Company's corporate headquarters. After consideration of the non-recurring items described above, Dynegy's normalized net income for the year ended December 31, 1998, approximated $97.6 million, or $0.59 per diluted share, compared with normalized net income of $108.7 million, or $0.65 per diluted share, in 1997 and $115.8 million, or $0.85 per diluted share, in 1996. The lower normalized results in 1998 as compared with the previous two years generally reflect a material increase in earnings derived from the Company's Wholesale Gas and Power segment offset by the significant negative impact that crude and NGL commodity prices had on the Liquids segment in 1998, as well as a trend towards higher overhead, depreciation and interest costs during the three-year period. Consolidated operating margin for each of the three years in the period ended December 31, 1998, totaled $428.7 million, $385.3 million and $369.5 million, respectively. For the year ended December 31, 1998, the Company reported operating income of $120.1 million, compared with an operating loss of $143.4 million and operating income of $197.8 million for the 1997 and 1996 periods, respectively. Operating income in both the 1998 and 1997 periods was negatively impacted by the pre-tax effect of portions of the aforementioned non-recurring items. The increase in depreciation and amortization expense during the three year period reflects the depreciable assets acquired in the Chevron Combination and the Destec Acquisition as well as the continued expansion of the Company's depreciable asset base through other asset acquisitions and capital projects completed during the three-year period. Depreciation and amortization expense in the 1998 period benefited from the prospective effect of the asset impairments and abandonments recognized in 1997. The increase in general and administrative expenses period to period principally reflects the incremental costs associated with the operations acquired in the strategic acquisitions, the restructuring of the Company's businesses in Canada and the United Kingdom, the expansion of ECI's operations, the growth of the international LPG operations, non- capitalizable consulting and other costs required to support technology infrastructure improvements and, to a lesser degree, expenses related to identifying and resolving Year 2000 issues. 35 During the three-year period ended December 31, 1998, the Company significantly increased its investment in unconsolidated affiliates, principally as a result of the ownership interests and legal structures employed in a majority of the investments made by the Wholesale Gas and Power segment. As a result, the financial results of Dynegy's equity investments to its consolidated operating results have become more significant. The Company has structured these investments to mitigate financial risk to the corporation. In addition, the bylaws of a majority of these investments require periodic cash distributions allowing Dynegy to manage its share of cash flow generated by these investments in an efficient manner. The Company's equity share in the earnings of its unconsolidated affiliates contributed an aggregate $91.0 million to 1998 pre-tax results, compared to $59.0 million in 1997 and $28.1 million in 1996. Cash distributions received from these investments during each of the three years in the period ended December 31, 1998 approximated $85 million, $64 million and $7 million, respectively. The following table provides a summary of equity earnings by investment for the comparable periods:
DYNEGY'S EQUITY EARNINGS FROM UNCONSOLIDATED AFFILIATES YEARS ENDED DECEMBER 31, -------------------------------------------------------------- 1998 1997 1996 -------------------------------------------------------------- ($ IN THOUSANDS) Accord Energy Limited (1) $ 21,822 $ 25,885 $ 17,131 Other Gas Marketing Investments, Including (3,469) (2,942) 2,959 NCL (1) Electric Power Marketing Investments 509 518 606 Power Generation Investments 56,380 12,780 -- Gulf Coast Fractionators 3,741 6,624 3,360 West Texas LPG Pipeline Limited Partnership 6,428 7,162 1,661 Venice Energy Services Company, L.L.C. 4,310 8,052 2,429 Other Liquids Businesses Investments, net 1,317 880 (71) --------- --------- --------- $ 91,038 $ 58,959 $ 28,075 ========= ========= ========= ============================================================================================================
1. For a discussion of the Accord and NCL restructurings, refer to Note 11 of the Consolidated Financial Statements. Interest expense totaled $75.0 million for the year ended December 31, 1998, compared with $63.5 million and $46.2 million for the comparable 1997 and 1996 periods. The higher interest expense period to period is attributed to higher average outstanding principal amounts resulting primarily from debt assumed in and resulting from the Chevron Combination and the Destec Acquisition offset partially by interest rates that trended lower over the three-year period. Other income and expenses, net benefited the operating results in 1998 and 1997 by $39.1 million and $7.9 million, respectively, while the 1996 period reflected a net charge of $10 million. Each of the net amounts results principally from the pre-tax effect of certain of the aforementioned non- recurring items recognized in each period as well as numerous other less significant recurring and non-recurring income and expense items. During the second quarter of 1997, the Company sold $200 million aggregate liquidation amount of 8.316% Subordinated Capital Income Securities. Accumulated distributions associated with these Securities totaled $16.6 million and $9.8 million for the years ended December 31, 1998 and 1997, respectively. The Company reported an income tax provision of $50.3 million in 1998, compared to an income tax benefit of $62.2 million in 1997 and an income tax provision of $56.3 million in 1996, reflecting effective rates of 32 percent, (41) percent and 33 percent, respectively. In general, differences between the aforementioned effective rates and the statutory rate of 35 percent result primarily from permanent differences attributable to amortization of certain intangibles, permanent differences arising from the effect of certain foreign equity investments and state income taxes. WHOLESALE GAS AND POWER - Aggregate operating margin and equity earnings reported by this segment totaled $311.5 million for the year ended December 31, 1998, compared to $163.0 million in 1997 and $124.3 million in 1996. The material increase in financial contribution by this segment period to period results from, among other things, the successful execution of the Merchant Leverage Effect during the 1998 period, the expansion of the Company's investment in power generation over the three-year period and the impetus placed by this segment on quality of operating margins over the quantity of sales volumes. 36 Worldwide gas marketing operations generated operating margin and equity earnings for the year ended December 31, 1998 of $148.4 million compared to $126.2 million in 1997 and $120.3 million in 1996, a 23 percent growth during the three-year period. Market conditions in 1998 and 1997 were influenced by unseasonably warm weather in the winter months that eliminated any significant volatility in commodity prices during those periods. Conversely, the 1996 period included a very cold first quarter that resulted in significant regional swings in commodity prices, benefiting per unit margins in that period. The growth in financial contribution from this business reflects the Company's expanded gas marketing operations in Canada and in the United Kingdom as well as the emphasis on the quality of the Company's customer base, which had its most significant impact on domestic operations. Worldwide sales volumes totaled 8.9 Bcf/d in 1998, 8.2 Bcf/d in 1997 and 4.3 Bcf/d in 1996. Worldwide per-unit margins were $0.040, $0.035 and $0.064 for each of three years in the period ended December 31, 1998, respectively. Power marketing operations generated operating margin and equity earnings for the year ended December 31, 1998 of $43.3 million compared to $5.0 million in 1997 and $4.0 million in 1996. The dramatic growth in financial contribution from this business in 1998 reflects the value extraction derived from the extreme market volatility experienced in certain U.S. markets, particularly in the mid-west, during the 1998 summer coupled with an eightfold increase in sales volumes during the three-year period. Operating margins in this business also benefited from the selectivity analysis performed on its customer base. The power generation business reported explosive growth in 1998, generating operating margin and equity earnings for the year of $119.8 million. Results for 1998 are not comparable with 1997 as a result of the acquisition of Destec in mid-year 1997. However, the execution of Dynegy's strategy of integrating the businesses in this segment and leveraging off the physical assets to enhance the returns from its marketing and trading businesses was successful during the 1998 period. LIQUIDS - Aggregate operating margin and equity earnings reported by this segment totaled $208.2 million for the year ended December 31, 1998, compared to $281.2 million in 1997 and $273.3 million in 1996. The decrease in financial contribution by this segment period to period results primarily from the negative impact that NGL and crude oil commodity prices had on operations. During 1998, NGL prices averaged $0.25 per gallon compared to $0.34 per gallon in 1997 and $0.39 per gallon in 1996. Likewise, crude oil prices gravitated downward during the three-year period averaging $11.97 per barrel in 1998, $18.64 per barrel in 1997 and $20.42 per barrel in 1996. The commodity price environment during 1998 placed significant downward pressure on operating margins. The initiatives undertaken by this segment beginning in the fourth quarter of 1997 and executed throughout 1998 allowed the businesses to improve operating efficiencies, reduce costs and mitigate exposure to asset impairments resulting from commodity price variability. During 1997, operating margins from these businesses were negatively impacted by high-cost inventory purchased during the fourth quarter of 1996, which was recognized in operating results during the first quarter of 1997, culminating in a lower-of-cost-or-market writedown of $12.3 million at March 31, 1997. Additionally, included in the 1997 period are pre-tax charges related to a lower-of-cost-or-market writedown of crude oil inventory of $2.7 million and a hedge-related loss of $8.3 million. The 1996 period results are not comparable as a result of the acquisition of the mid-stream operations of Chevron effective September 1, 1996. Operationally, this segment's businesses continue to reflect a leadership position in significantly all domestic mid-stream businesses. Aggregate domestic natural gas liquids processing volumes totaled 122.7 thousand gross barrels per day in 1998 compared to an average 136.2 thousand gross barrels per day during 1997 and 94.3 thousand gross barrels per day in 1996. The lower volumes in 1998 reflect the economic decisions made during the 1998 period to reduce production at its straddle processing plants principally as a result of the relationship of natural gas and NGL commodity prices. Fractionation volumes and natural gas liquids marketing volumes remained relatively level with 1997 amounts averaging 192.5 and 410.7 thousand barrels per day, respectively, during 1998. Crude oil marketing volumes increased 126 percent during the three- year period averaging 239.6 thousand barrels per day during 1998. The Company's LPG sales volumes reduced during 1998 as compared with 1997. However, the effect of lower sales volumes was more than offset by significantly higher unit margins in 1998. OPERATING CASH FLOW Cash flow from operating activities totaled $250.8 million during the year ended December 31, 1998 compared to $278.6 million during 1997. For the year ended December 31, 1996, the Company used $31 million in support of its operations. Changes in operating cash flow reflect the operating results previously discussed herein and the continued focus on management of working capital, particularly trade accounts receivables and payables and the reduction of discretionary inventory volume purchases period to period. Changes in other working capital accounts, which include prepayments, other current assets and 37 accrued liabilities, reflect expenditures or recognition of liabilities for insurance costs, certain deposits, salaries, taxes other than on income, certain deferred revenue accounts and other similar items. Fluctuations in these accounts, period to period, reflect changes in the timing of payments or recognition of liabilities and are not directly impacted by seasonal factors. The 1997 period benefited from the advance payment for future gas deliveries previously discussed. CAPITAL EXPENDITURES, COMMITMENTS AND DIVIDEND REQUIREMENTS Capital Expenditures and Investing Activities. During the year ended December 31, 1998, the Company invested a net $379.5 million, principally on discrete asset acquisitions primarily focused in the Wholesale Gas and Power segment. Expenditures were also made to complete construction of the Lake Charles, Louisiana fractionator, for capital improvements at existing facilities and on capital additions at the Company's headquarters. During the period, the Company divested itself of its investment in Ozark, as well as certain non- strategic Liquids Segment assets. Aggregate net proceeds from these dispositions approximated $84 million. During the year ended December 31, 1997, the Company spent a net $510.7 million, principally on the Destec Acquisition, the purchase of NCL's gas marketing operations and on acquisitions of additional interests in gas processing facilities, pipelines and other mid-stream assets. Expenditures were also made on capital improvements at existing facilities and on capital additions at the Company's headquarters. The Company invested $27.7 million in its unconsolidated affiliates, principally for amounts committed to VESCO. During the period, the Company divested itself of the Mont Belvieu I fractionation facility pursuant to an agreement reached with the Federal Trade Commission related to the Chevron Combination. Further, Dynegy sold its 49.9 percent interest in NCL, as part of the restructuring of that investment and consummated the sales of certain non-strategic assets acquired in the Destec Acquisition. Aggregate net proceeds from these dispositions, plus proceeds from other immaterial dispositions, approximated $453 million. Dynegy acquired Destec on June 27, 1997, in a transaction valued at $1.26 billion, or $21.65 per share of Destec common stock. Concurrent with this acquisition, Dynegy sold Destec's international facilities and operations to The AES Corporation for $439 million. In July and August 1997, the Company sold Destec's interest in a partnership that owned a power generation facility and certain oil, gas and lignite reserves, respectively, for aggregate proceeds of $296 million. Proceeds from the sales of these non-strategic assets were used to retire debt incurred in the acquisition. During 1996, the Company spent a net $111 million in acquisition, capital project and asset maintenance activities. These funds were expended principally for maintenance of existing assets, the acquisition of processing plants, gathering lines, pipelines and on discrete capital assets. In addition, during 1996, the Company completed the acquisitions of LPG Services Group, Inc., a propane gas marketing and distribution company, and Wilmar Energy Marketing, a Calgary based crude oil marketer. Investments in unconsolidated affiliates included contributions of $18.6 million to VESCO. As reflected in the accompanying notes to the consolidated financial statements, the Chevron Combination was consummated principally through the assumption of debt and the issuance of capital stock. DIVIDEND REQUIREMENTS AND STOCK REPURCHASES. Dynegy declares quarterly dividends on its outstanding common stock at the discretion of its Board of Directors. The holders of the Series A Preferred Stock are entitled to receive dividends or distributions equal per share in amount and kind to any dividend or distribution payable on shares of the Company's common stock, when and as the same are declared by the Company's Board of Directors. During the years ended December 31, 1998, 1997 and 1996, the Company paid approximately $8.0 million, $7.9 million and $6.7 million in cash dividends and distributions, respectively. In May 1997, the Board of Directors approved a stock repurchase program that allows the Company to repurchase, from time to time, up to 1.6 million shares of common stock in open-market transactions. The timing and number of shares ultimately repurchased will depend upon market conditions and consideration of alternative investments. Pursuant to this program, the Company acquired 545,800 shares of its stock through open-market trades during the year ended December 31, 1998, at a total cost of $6.9 million, or $12.65 per share on a weighted average cost basis. For the year ended December 31, 1997, the Company acquired 654,900 shares of its common stock in open-market transactions for an aggregate cost of $10.5 million, or $16.04 per share on a weighted average cost basis. 38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and financial statement schedule of the Company are set forth at pages F-1 through F-36 inclusive, found at the end of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain of the information required by this Item 10 will be contained in the definitive Proxy Statement of the Company for its 1999 Annual Meeting of Stockholders (the "Proxy Statement") under the headings "Proposal 1 -- Election of Directors" and "Executive Compensation -- Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1998. Reference is also made to the information appearing in Part I of this Annual Report on Form 10-K under the caption "Item 1A. Executive Officers." ITEM 11. EXECUTIVE COMPENSATION Information with respect to executive compensation will be contained in the Proxy Statement under the heading "Executive Compensation" and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding ownership of certain of the Company's outstanding securities will be contained in the Proxy Statement under the heading "Principal Stockholders" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding related party transactions will be contained in the Proxy Statement under the headings "Principal Stockholders", "Proposal 1 -- Election of Directors" and "Executive Compensation -- Indebtedness of Management" and "-- Certain Relationships and Related Transactions" and is incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K The following documents, which have been filed by the Company with the Securities and Exchange Commission pursuant to the Securities and Exchange Act of 1934, as amended, are by this reference incorporated in and made a part of this statement: a. Financial Statements -- Consolidated financial statements of the Company and its subsidiaries are incorporated under Item 8. of this Form 10-K. c. b. Exhibits -- The following instruments and documents are included as exhibits to this Form 10-K. 39
EXHIBIT NUMBER DESCRIPTION 2.1 - Combination Agreement and Plan of Merger, dated May, 22, 1996, by and between NGC Corporation, Chevron U.S.A. Inc. and Midstream Combination Corp.(7) 2.2 - Amendment to Combination Agreement, dated as of August 29, 1996, by and among NGC Corporation, Chevron U.S.A. Inc. and Midstream Combination Corp.(5) 2.3 - Agreement and Plan of Merger by and among Destec Energy, Inc., The Dow Chemical Company, NGC Corporation and NGC Acquisition Corporation II dated as of February 17, 1997. (8) 2.4 - Asset Purchase Agreement by and between NGC Corporation and The AES Corporation dated as of February 17, 1997. (8) 2.5 - First Amendment to Asset Purchase Agreement by and between NGC Corporation and The AES Corporation dated June 29, 1997.(9) 2.6 - Asset Purchase Agreement between Destec Energy, Inc. and ECT EOCENE Enterprises, Inc. dated July 1, 1997.(9) 3.1 - Restated Certificate of Incorporation of NGC Corporation. (8) 3.2 - Certificate of Amendment to Restated Certificate of Incorporation of NGC Corporation (14) 3.3 - Bylaws of Dynegy Inc. (14) 4.1 - Warrant exercisable for 6,228 shares of Common Stock of NGC Corporation registered in the name of J. Otis Winters. (2) 4.2 - Indenture, dated as of December 11, 1995, by and between NGC Corporation, the Subsidiary Guarantors named therein and the First National Bank of Chicago, as Trustee.(4) 4.3 - First Supplemental Indenture, dated as of August 31, 1996, by and among NGC Corporation, the Subsidiary Guarantors named therein, and The First National Bank of Chicago, as Trustee, supplementing and amending the Indenture dated as of December 11, 1995. (5) 4.4 - Second Supplemental Indenture, dated as of October 11, 1996, by and among NGC Corporation, the Subsidiary Guarantors named therein, and The First National Bank of Chicago, as Trustee, supplementing and amending the Indenture dated as of December 11, 1995. (5) 4.5 - Amended and Restated Credit Agreement dated as of June 27, 1997, among NGC Corporation and The First National Bank of Chicago, Individually and as Agent, The Chase Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents, and the Lenders Named therein.(9) 4.6 - First Amendment to Amended and Restated Credit Agreement, dated November 24, 1997, among NGC Corporation and The First National Bank of Chicago, Individually and as Agent, The Chase Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents for the Lenders named therein. (13) 4.7 - Second Amendment to Amended and Restated Credit Agreement, dated as of February 20, 1998, among NGC Corporation and The First National Bank of Chicago, Individually and as Agent, The Chase Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents for the Lenders named therein. (13)
40
EXHIBIT NUMBER DESCRIPTION 4.8 - Subordinated Debenture Indenture between NGC Corporation and The First National Bank of Chicago, as Debenture Trustee, dated as of May 28, 1997. (10) 4.9 - Amended and Restated Declaration of Trust among NGC Corporation, Wilmington Trust Company, as Property Trustee and Delaware Trustee, and the Administrative Trustees named therein, dated as of May 28, 1997. (10) 4.10 - Series A Capital Securities Guarantee executed by NGC Corporation and The First National Bank of Chicago, as Guarantee Trustee, dated as of May 28, 1997. (10) 4.11 - Common Securities Guarantee of NGC Corporation dated as of May 28, 1997. (10) 4.12 - Registration Rights Agreement, dated as of May 28, 1997, among NGC Corporation, NGC Corporation Capital Trust I, Lehman Brothers, Salomon Brothers Inc. and Smith Barney Inc. (10) 4.13 - Second Supplemental Indenture among NGC Corporation, Destec Energy, Inc. and The First National Bank of Chicago, as Trustee, dated as of June 30, 1997, supplementing and amending the Indenture dated as of June 30, 1997. (11) 4.14 - Fourth Supplemental Indenture among NGC Corporation, Destec Energy, Inc. and The First National Bank of Chicago, as Trustee, dated as of June 30, 1997, supplementing and amending the Indenture dated as of December 11, 1995. (11) 4.15 - Fifth Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee, dated as of September 30, 1997, supplementing and amending the Indenture dated as of December 11, 1995. (13) 4.16 - Sixth Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee, dated as of January 5, 1998, supplementing and amending the Indenture dated as of December 11, 1995. (13) 4.17 - Seventh Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee, dated as of February 20, 1998, supplementing and amending the Indenture dated as of December 11, 1995. (13) 4.18 - Indenture, dated as of September 26, 1996, restated as of March 23, 1998, to include amendments in the First through Fifth Supplemental Indentures, between NGC Corporation and The First National Bank of Chicago, as Trustee. (13) 4.19 - Credit Agreement dated as of May 27, 1998, among NGC Corporation and The First National Bank of Chicago, Individually and as Administrative Agent, The Chase Manhattan Bank, Individually and as Syndication agent and NationsBank, N.A., Individually and as Documentation Agent and the Lenders named therein. (12) 4.20 - 364-Day Revolving Credit Agreement dated as of May 27, 1998, among NGC Corporation and The First National Bank of Chicago, Individually and as Administrative Agent, The Chase Manhattan Bank, Individually and as Syndication agent and NationsBank, N.A., Individually and as Documentation Agent and the Lenders named therein. (12) 10.1 - Agreement of Sale and Purchase of Assets, dated as of May 5, 1991, as amended on June 6, 1991 and August 30, 1991, by and between OXY USA Inc. and Trident Energy, Inc. (1)
41
EXHIBIT NUMBER DESCRIPTION 10.2 - Master Agreement on Gas Processing, dated as of May 5, 1991, by and between OXY USA Inc. and Trident NGL, Inc.(1) + 10.3 - Dynegy Inc. Amended and Restated 1991 Stock Option Plan. + 10.4 - Dynegy Inc. 1998 U.K. Stock Option Plan + 10.5 - Dynegy Inc. Amended and Restated Employee Equity Option Plan. 10.6 - The Amended and Restated Natural Gas Clearinghouse Deferred Compensation Plan, dated February 28, 1992.(3) 10.7 - Employment Agreement dated April 2, 1996 by and between NGC Corporation and Stephen A. Furbacher.(6) 10.8 - Employment Agreement, dated as of April 30, 1997, between Charles L. Watson and NGC Corporation. (13) 10.9 - Employment Agreement, dated as of May 8, 1997, between Stephen W. Bergstrom and NGC Corporation. (13) 10.10 - Employment Agreement, dated as of April 14, 1997, between John U. Clarke and NGC Corporation. (13) + 10.11 - First Amendment to Employment Agreement, dated December 11, 1998, between John U. Clarke and NGC Corporation (n/k/a Dynegy Inc.). 10.12 - Employment Agreement, dated as of May 21, 1997, between Kenneth E. Randolph and NGC Corporation. (13) + 10.12a - Employment Agreement, dated as of July 1, 1997, by and between Dan Ryser and NGC Corporation. 10.13 - Lease Agreement entered into on June 12, 1996 between Metropolitan Life Insurance Company and Metropolitan Tower Realty Company, Inc., as landlord, and NGC Corporation, as tenant. (6) 10.14 - First Amendment to Lease Agreement entered into on June 12, 1996 between Metropolitan Life Insurance Company and Metropolitan Tower Realty Company, Inc., as landlord, and NGC Corporation, as tenant. (6) 10.15 - Contribution and Assumption Agreement, dated as of August 31, 1996, among Chevron U.S.A. Inc., Chevron Pipe Line Company, Chevron Chemical Company and Midstream Combination Corp. (5) 10.16 - Scope of Business Agreement, dated May 22, 1996 between Chevron Corporation and NGC Corporation. (6) 10.17 - Stockholders Agreement dated, May 22, 1996, among BG Holdings, Inc., NOVA Gas Services (U.S.) Inc. and Chevron U.S.A. Inc. (6) 10.18 - Registration Rights Agreement, dated as of August 31,1996, among NGC Corporation, BG Holdings, Inc., NOVA Gas Services (U.S.) Inc. and Chevron U.S.A. Inc. (5)
42
EXHIBIT NUMBER DESCRIPTION 10.19 - Master Alliance Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc., Chevron Chemical Company, Chevron Pipe Line Company, and other Chevron U.S.A. Inc. affiliates, NGC Corporation, Natural Gas Clearinghouse, Warren Petroleum Company, Limited Partnership, Electric Clearinghouse, Inc. and other NGC Corporation affiliates. (5) * 10.20 - Natural Gas Purchase and Sale Agreement, dated as of August 30, 1996, among Chevron U.S.A. Inc. and Natural Gas Clearinghouse. (5) * 10.21 - Master Natural Gas Processing Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership. (5) * 10.22 - Master Natural Gas Liquids Purchase Agreement, dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron U.S.A. Inc. (5) * 10.23 - Gas Supply and Service Agreement, dated as of September 1, 1996, among Chevron Products Company and Natural Gas Clearinghouse. (5) 10.24 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc. and Chevron U.S.A. Production Company. (6) 10.25 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc. and Chevron Chemical Company. (6) 10.26 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc. and Chevron Products Company. (6) * 10.27 - Feedstock Sale and Refinery Product Purchase Agreements, dated as of September 1, 1996, among Chevron Products Company and Warren Petroleum Company, Limited Partnership.(5) * 10.28 - Refinery Product Sale Agreement (Hawaii), dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron Products Company. (5) * 10.29 - Feedstock Sale and Refinery Product Master Services Agreement, dated as of September 1, 1996, among Chevron Products Company and Warren Petroleum Company, Limited Partnership. (5) * 10.30 - CCC Product Sale and Purchase Agreement dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron Chemical Company. (5) * 10.31 - CCC/WPC Services Agreement, dated as of September 1, 1996, among Chevron Chemical Company and Warren Petroleum Company, Limited Partnership. (5) * 10.32 - Operating Agreement, dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron Pipe Line Company. (5) 10.33 - Galena Park Services Agreement, dated as of September 1, 1996, among Chevron Products Company and Midstream Combination Corp. (5) * 10.34 - Venice Complex Operating Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership. (6)
43
EXHIBIT NUMBER DESCRIPTION * 10.35 - Product Storage Lease and Terminal Access Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership. (6) 10.36 - Lone Star Swap Transaction Confirmation Term Sheet, dated as of September 1, 1996, among Chevron U.S.A. Inc. and NGC Corporation. (5) * 10.37 - West Texas LPG Pipeline Limited Partnership Agreement, dated as of September 1, 1996, by and between Chevron Pipe Line Company, or an affiliate thereof, and an affiliate of NGC Corporation. (5) * 10.38 - West Texas LPG Pipeline Operating Agreement, dated as of September 1, 1996, by and between Chevron Pipe Line Company, or an affiliate thereof, and the West Texas LPG Pipeline Partnership. (5) * 10.39 - Time Charter, dated as of August 31, 1996, by and between Midstream Barge Company, L.L.C. and Warren Petroleum Company, Limited Partnership. (5) * 10.40 - Limited Liability Company Agreement of Midstream Barge Company, L.L.C., dated as of August 31, 1996, by and between Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership. (5) + 10.41 - Dynegy Inc. Severance Pay Plan. + 10.42 - NGC Profit Sharing/401(k) Savings Plan. + 10.43 - First Amendment to NGC Profit Sharing/401(k) Savings Plan. + 10.44 - Second Amendment to NGC Profit Sharing/401(k) Savings Plan. + 12.1 - Computation of Ratio of Earnings to Fixed Charges. + 22.1 - Subsidiaries of the Registrant. + 23.1 - Consent of Arthur Andersen LLP. + 27.1 - Financial Data Schedule.
- --------------- + Filed herewith * Exhibit omits certain information which the Company has filed separately with the Commission pursuant to a confidential treatment request pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. (1) Incorporated by reference to exhibits to the Registration Statement of Trident NGL, Inc. on Form S-1, Registration No. 33-43871. (2) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1993 of Trident NGL Holding, Inc., Commission File No. 1-11156. (3) Incorporated by reference to exhibits to the Registration Statement of Trident NGL Holding, Inc. on Form S-4, Registration No. 33-88907. (4) Incorporated by reference to the Registration Statement of NGC Corporation on Form S-3, Registration No. 33-97368. (5) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1996, of NGC Corporation, Commission File No. 1-11156. 44 (6) Incorporated by reference to exhibits to the Registration Statement of Midstream Combination Corp. on Form S-4, Registration No. 333-09419. (7) Incorporated by reference to exhibits to the Current Report on Form 8-K of NGC Corporation, dated May 22, 1996, Commission File No. 1-11156. (8) Incorporated by reference to exhibits to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1996, of NGC Corporation, Commission File No. 1-11156. (9) Incorporated by reference to exhibits to the Current Report on Form 8-K of NGC Corporation, Commission File No. 1-11156, dated June 27, 1997. (10) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1997, Commission File No. 1-11156. (11) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1997, Commission File No. 1-11156 (12) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1998, Commission File No. 1-11156. (13) Incorporated by reference to exhibits to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997, of NGC Corporation, Commission File No. 1-11156. (14) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period ended September 30, 1998, Commission File No. 1-11156. (b) Reports on Form 8-K of Dynegy Inc.. None. 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dynegy Inc. Date: February 26, 1999 By: /s/ C. L. Watson ------------------------------------- C. L. Watson, Chairman of the Board, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: February 26, 1999 By: /s/ C. L. Watson ------------------------------------- C. L. Watson, Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) Date: February 26, 1999 By: /s/ John U. Clarke ------------------------------------- John U. Clarke, Senior Vice President, Chief Financial Officer (Principal Financial Officer) and Advisory Director Date: February 26, 1999 By: /s/ Bradley P. Farnsworth ------------------------------------- Bradley P. Farnsworth, Vice President and Controller (Principal Accounting Officer) Date: February 26, 1999 By: /s/ Stephen W. Bergstrom ------------------------------------- Stephen W. Bergstrom, President and Chief Operating Officer of Dynegy Marketing and Trade and Director Date: February 26, 1999 By: /s/ Stephen J. Brandon ------------------------------------- Stephen J. Brandon, Director Date: February 26, 1999 By: /s/ Stanley I. Rubenfeld ------------------------------------- Stanley I. Rubenfeld, Director Date: February 26, 1999 By: /s/ P. Nicholas Woollacott ------------------------------------- P. Nicholas Woollacott, Director 46 Date: February 26, 1999 By: /s/ Jack S. Mustoe -------------------------------------- Jack S. Mustoe, Director Date: February 26, 1999 By: /s/ Jeffrey M. Lipton -------------------------------------- Jeffrey M. Lipton, Director Date: February 26, 1999 By: /s/ A. Terrance Poole -------------------------------------- A. Terence Poole, Director Date: February 26, 1999 By: /s/ -------------------------------------- Darald W. Callahan, Director Date: February 26, 1999 By: /s/ Patricia A. Woertz -------------------------------------- Patricia A. Woertz, Director Date: February 26, 1999 By: /s/ Peter J. Robertson -------------------------------------- Peter J. Robertson, Director Date: February 26, 1999 By: /s/ Daniel L. Dienstbier -------------------------------------- Daniel L. Dienstbier, Director Date: February 26, 1999 By: /s/ J. Otis Winters -------------------------------------- J. Otis Winters, Director 47 DYNEGY INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Consolidated Financial Statements Report of Independent Public Accountants....................... F-2 Consolidated Balance Sheets as of December 31, 1998 and 1997... F-3 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996............................. F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996............................. F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996......... F-6 Notes to Consolidated Financial Statements..................... F-7 FINANCIAL STATEMENT SCHEDULE Condensed Financial Statements of the Registrant............... F-32 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Dynegy Inc.: We have audited the accompanying consolidated balance sheets of Dynegy Inc. (a Delaware corporation formerly known as NGC Corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dynegy Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The information included in Schedule I is presented for the purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Houston, Texas February 24, 1999 F-2 DYNEGY INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) DECEMBER 31, DECEMBER 31, 1998 1997 ASSETS ------------ ------------ Current Assets Cash and cash equivalents $ 28,367 $ 23,047 Accounts receivable, net 1,563,558 1,536,451 Accounts receivable, affiliates 60,180 139,321 Inventories 149,901 136,485 Assets from risk-management activities 219,105 127,929 Prepayments and other assets 96,130 55,547 ---------- ---------- 2,117,241 2,018,780 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT 2,446,878 1,958,250 Less: accumulated depreciation (514,771) (436,674) ---------- ---------- 1,932,107 1,521,576 ---------- ---------- OTHER ASSETS Investments in unconsolidated affiliates 502,613 470,477 Assets from risk-management activities 135,100 111,341 Other assets 577,176 394,729 ---------- ---------- $5,264,237 $4,516,903 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $1,370,902 $1,404,736 Accounts payable, affiliates 113,827 24,187 Accrued liabilities and other 290,381 192,159 Liabilities from risk-management activities 251,213 132,012 ---------- ---------- 2,026,323 1,753,094 LONG-TERM DEBT 1,046,890 1,002,054 OTHER LIABILITIES Liabilities from risk-management activities 40,747 42,679 Deferred income taxes 317,537 254,059 Other long-term liabilities 504,677 245,892 ---------- ---------- 3,936,174 3,297,778 ---------- ---------- COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST 200,000 200,000 COMMITMENTS AND CONTINGENCIES (NOTE 9) STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, 50,000,000 shares authorized; 8,000,000 shares designated as Series A Participating Preferred Stock, 7,815,363 shares issued and outstanding at December 31, 1998 and 1997, respectively 75,418 75,418 Common stock, $.01 par value, 400,000,000 shares authorized; 153,298,220 shares issued at December 31, 1998 and 151,796,622 shares issued at December 31, 1997 1,533 1,518 Additional paid-in capital 935,183 919,720 Retained earnings 133,340 32,975 Less: treasury stock, at cost: 1,200,700 shares at December 31, 1998 and 654,900 shares at December 31, 1997 (17,411) (10,506) ---------- ---------- 1,128,063 1,019,125 ---------- ---------- $5,264,237 $4,516,903 ========== ========== See Notes to Consolidated Financial Statements. F-3 DYNEGY INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
YEAR ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 ----------- ----------- ---------- Revenues $14,257,997 $13,378,380 $7,260,202 Cost of sales 13,829,310 12,993,086 6,890,702 ----------- ----------- ---------- Operating margin 428,687 385,294 369,500 Depreciation and amortization 113,202 104,391 71,676 Impairment, abandonment and other charges 9,644 275,000 --- General and administrative expenses 185,708 149,344 100,032 ----------- ----------- ---------- Operating income (loss) 120,133 (143,441) 197,792 Equity in earnings of unconsolidated affiliates 91,038 58,959 28,075 Other income 46,821 28,113 5,485 Relocation costs --- --- (4,000) Interest expense (74,992) (63,455) (46,202) Other expenses (7,677) (20,230) (11,505) Minority interest in income of a subsidiary (16,632) (9,841) --- ----------- ----------- ---------- Income (loss) before income taxes 158,691 (149,895) 169,645 Income tax provision (benefit) 50,338 (62,210) 56,323 ----------- ----------- ---------- Net income (loss) from continuing operations before cumulative effect of accounting change 108,353 (87,685) 113,322 Cumulative effect of change in accounting principle (net of income tax benefit of $7,913) --- (14,800) --- ----------- ----------- ---------- NET INCOME (LOSS) $ 108,353 $ (102,485) $ 113,322 =========== =========== ========== Net Income Per Share: Net income (loss) from continuing operations $ 108,353 $ (87,685) $ 113,322 Cumulative effect of change in accounting principle (net of income tax benefit of $7,913) --- (14,800) --- Less: preferred stock dividends (391) (391) (132) ----------- ----------- ---------- Net income (loss) applicable to common stockholders $ 107,962 $ (102,876) $ 113,190 =========== =========== ========== Basic earnings (loss) per share $ 0.71 $ (0.68) $ 0.99 =========== =========== ========== Diluted earnings per share $ 0.66 $ n/a $ 0.83 =========== =========== ========== Basic shares outstanding 151,619 150,653 114,093 =========== =========== ========== Diluted shares outstanding 164,605 167,009 136,099 =========== =========== ==========
See Notes to Consolidated Financial Statements. F-4 DYNEGY INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 ----------- ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 108,353 $ (102,485) $ 113,322 Items not affecting cash flows from operating activities: Depreciation, amortization, impairment and abandonment 102,577 378,916 73,176 Equity in earnings of affiliates, net of cash distributions (6,477) (4,073) (21,729) Risk management activities (7,422) (8,757) (11,220) Deferred income taxes 52,308 (86,424) 45,896 Amortization of bond premium (2,572) (6,768) (4,892) Other, including gains on sale of assets (22,540) 1,249 7,466 Change in assets and liabilities resulting from operating activities: Accounts receivable 51,046 (35,845) (954,418) Inventories (17,380) 86,077 (116,353) Prepayments and other assets (30,605) (20,686) 7,726 Accounts payable 44,113 (22,601) 778,767 Accrued liabilities (27,699) 14,064 47,148 Other, net 7,078 85,922 4,157 --------- ----------- ----------- Net cash provided by (used in) operating activities 250,780 278,589 (30,954) --------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (298,738) (220,003) (97,651) Investment in unconsolidated affiliates (78,096) (27,708) (30,875) Business acquisitions, net of cash acquired (2,644) (715,589) (714) Proceeds from asset sales 45,044 452,565 3,600 Other, net 39,352 --- 14,500 --------- ----------- ----------- Net cash used in investing activities (295,082) (510,735) (111,140) --------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings 212,259 2,218,500 1,542,000 Repayments of long-term borrowings (493,277) (2,198,275) (1,360,081) Net proceeds from commercial paper and money market lines of credit 350,758 --- --- Proceeds from sale of capital stock, options and warrants 3,863 5,147 858 Issuance of company obligated preferred securities of a subsidiary trust, net --- 198,043 --- Treasury stock acquisitions (6,905) (10,506) --- Dividends and other distributions, net (7,988) (7,925) (6,740) Other, net (9,088) --- --- --------- ----------- ----------- Net cash provided by financing activities 49,622 204,984 176,037 --------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 5,320 (27,162) 33,943 Cash and cash equivalents, beginning of year 23,047 50,209 16,266 --------- ----------- ----------- Cash and cash equivalents, end of year $ 28,367 $ 23,047 $ 50,209 ========= =========== ===========
See Notes to Consolidated Financial Statements. F-5 DYNEGY INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands)
SERIES A PREFERRED COMMON STOCK ADDITIONAL TREASURY STOCK ------------------------- ---------------------- PAID-IN RETAINED ------------------------ SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT ----------- ------------ ---------- ----------- ----------- ---------- ----------- ---------- Balance at December 31, 1995 --- $ --- 110,493 $1,105 $515,785 $ 35,490 --- $ --- Chevron Combination 7,815 75,418 38,623 386 372,328 --- --- --- Net income --- --- --- --- --- 113,322 --- --- Options exercised --- --- 374 3 1,320 --- --- --- Dividends and other distributions --- --- --- --- --- (5,427) --- --- 401(k) plan and profit sharing stock --- --- 309 4 4,175 --- --- --- issuances Options granted --- --- --- --- 2,824 --- --- --- Other --- --- 48 --- --- --- --- --- ------ ------- -------- ------ -------- --------- ----- -------- Balance at December 31, 1996 7,815 75,418 149,847 1,498 896,432 143,385 --- --- Net loss --- --- --- --- --- (102,485) --- --- Options exercised --- --- 1,541 15 11,577 --- --- --- Dividends and other distributions --- --- --- --- --- (7,925) --- --- 401(k) plan and profit sharing stock --- --- 385 5 7,401 --- --- --- issuances Options granted --- --- --- --- 4,044 --- --- --- Treasury stock --- --- --- --- --- --- (655) (10,506) acquisitions Other --- --- 24 --- 266 --- --- --- ------ ------- -------- ------ -------- --------- ----- -------- Balance at December 31, 1997 7,815 75,418 151,797 1,518 919,720 32,975 (655) (10,506) Net income --- --- --- --- --- 108,353 --- --- Options exercised --- --- 1,032 10 3,808 --- --- --- Dividends and other distributions --- --- --- --- --- (7,988) --- --- 401(k) plan and profit sharing stock --- --- 457 5 6,822 --- --- --- issuances Options granted --- --- --- --- 4,675 --- --- --- Treasury stock --- --- --- --- --- --- (546) (6,905) acquisitions Other --- --- 12 --- 158 --- --- --- ------ ------- -------- ------ -------- --------- ----- -------- Balance at December 31, 1998 7,815 $75,418 153,298 $1,533 $935,183 $ 133,340 (1,201) $(17,411) ====== ======= ======== ====== ======== ========= ===== =======
See Notes to Consolidated Financial Statements. F-6 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- ACCOUNTING POLICIES Dynegy Inc. ("Dynegy" or the "Company") is a holding company that conducts substantially all of its business through its subsidiaries. The Company is a leading provider of energy products and services in North America and the United Kingdom. Products marketed by the Company's wholesale marketing operations include natural gas, electricity, coal, natural gas liquids, crude oil, liquid petroleum gas and related services. The Company's wholesale marketing operations are supported by ownership or control of an extensive asset base and transportation network that includes unregulated power generation, gas and liquids storage capacity, gas, power and liquids transportation capacity and gas gathering, processing and fractionation assets. The accounting policies of Dynegy reflect industry practices and conform to generally accepted accounting principles. The more significant of such accounting policies are described below. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to develop estimates and make assumptions that affect reported financial position and results of operations and that impact the nature and extent of disclosure, if any, of contingent assets and liabilities. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after elimination of intercompany accounts and transactions. Investments in affiliates in which the Company has a significant ownership interest, generally 20 percent to 50 percent, are accounted for by the equity method. Other investments are carried at cost. Certain reclassifications have been made to prior-period amounts to conform with current period financial statement classifications. CASH AND CASH EQUIVALENTS. Cash and cash equivalents consist of all demand deposits and funds invested in short-term investments with original maturities of three months or less. CONCENTRATION OF CREDIT RISK. Dynegy provides multiple energy commodity solutions principally to customers in the electric and gas distribution industries and to entities engaged in industrial and petrochemical businesses. These industry concentrations have the potential to impact the Company's overall exposure to credit risk, either positively or negatively, in that the customer base may be similarly affected by changes in economic, industry or other conditions. Receivables are generally not collateralized; however, Dynegy believes the credit risk posed by industry concentration is offset by the diversification and creditworthiness of the Company's customer base. INVENTORIES. Inventories consisting primarily of natural gas in storage of $78.2 million and $35.2 million, natural gas liquids of $23.4 million and $55.4 million, and crude oil of $25.2 million and $23.2 million at December 31, 1998 and 1997, respectively, are valued at the lower of weighted average cost or at market. Materials and supplies inventory of $23.1 million and $19.8 million at December 31, 1998 and 1997, respectively, is carried at the lower of cost or market using the specific identification method. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment consisting principally of gas gathering, processing, fractionation, terminaling and storage facilities, natural gas transmission lines, pipelines, power generating facilities and supporting infrastructure is recorded at cost. Expenditures for major replacements and renewals are capitalized while expenditures for maintenance, repairs and minor renewals to maintain facilities in operating condition are expensed. Depreciation is provided using the straight-line method over the estimated economic service lives of the assets, ranging from three to 30 years. Composite depreciation rates are applied to functional groups of property having similar economic characteristics. Gains and losses are not recognized for retirements of property, plant and equipment subject to composite depreciation rates ("composite rate") until the asset group subject to the composite rate is retired. The Company reviews the carrying value of its long- lived assets in accordance with provisions of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets." ENVIRONMENTAL COSTS. Environmental costs relating to current operations are expensed or capitalized, as appropriate, depending on whether such costs provide future economic benefit. Liabilities are recorded when environmental assessment indicates that remedial efforts are probable and the costs can be reasonably estimated. Measurement of liabilities is based on currently enacted laws and regulations, existing technology and undiscounted, F-7 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS site-specific costs. Environmental liabilities in connection with assets that are sold or closed are realized upon such sale or closure, to the extent they are probable, can be estimated and have not previously been reserved. In assessing environmental liabilities, no offset is made for potential insurance recoveries. Recognition of any joint and several liability is based upon the Company's best estimate of its final pro rata share of such liability. INTANGIBLE ASSETS. Intangible assets are generally amortized by the straight-line method over an estimated useful life of up to 30 years. REVENUE RECOGNITION. Revenues for product sales and gas processing and marketing services are recognized when title passes to the customer or when the service is performed. Fractionation and transportation revenues are recognized based on volumes received in accordance with contractual terms. Revenues derived from power generation are recognized upon output, product delivery or satisfaction of specific targets, all as specified by contractual terms. Fees derived from engineering and construction contracts and development and other activities received from joint ventures in which Dynegy holds an equity interest are deferred to the extent of Dynegy's ownership interest and amortized on a straight-line basis over appropriate periods, which vary according to the nature of the service provided and the ventures' operations. The Company accounts for its North American fixed-price natural gas transactions using the mark-to-market method of accounting. Under such method, all fixed-price natural gas contracts are recorded at fair value, net of future servicing costs and reserves. Changes in the market value of these contracts are recognized as gain or loss in the period of change. The resulting unrealized gains and losses are recorded as assets and liabilities from risk management activities. The accrual method of accounting is used for fixed-price natural gas transactions in the United Kingdom and for accounting for fixed-price commodity transactions in its wholesale power, NGL and crude marketing activities. The Company routinely enters into financial instrument contracts to hedge purchase and sale commitments, fuel requirements and inventories in its natural gas liquids, crude oil, electricity and coal businesses in order to minimize the risk of market fluctuations. Dynegy also monitors its exposure to fluctuations in interest rates and foreign currency exchange rates and may execute swaps, forward-exchange contracts or other financial instruments to manage these exposures. Gains and losses from hedging transactions are recognized in income and are reflected as cash flows from operating activities in the periods for which the underlying commodity, interest rate or foreign currency transaction was hedged. If the necessary correlation to the commodity, interest rate or foreign currency transaction being hedged ceases to exist, the gain or loss associated with such contract(s) is no longer deferred and is recognized in the period correlation is lost. INCOME TAXES. The Company files a consolidated United States federal income tax return and, for financial reporting purposes, provides income taxes for the difference in the tax and financial reporting bases of its assets and liabilities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." EARNINGS PER SHARE. Basic earnings per share represents the amount of earnings for the period available to each share of common stock outstanding during the period. Diluted earnings per share represents the amount of earnings for the period available to each share of common stock outstanding during the period plus each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period. Differences between basic and diluted shares outstanding in all periods are attributed to the Series A Convertible Participating Preferred Stock, options outstanding and a warrant. FOREIGN CURRENCY TRANSLATIONS. For subsidiaries whose functional currency is other than U.S. dollar, assets and liabilities are translated at year-end rates of exchange and revenues and expenses are translated at average exchange rates prevailing during the year. For each of the three years in the period ended December 31, 1998, items of other comprehensive income were immaterial to the Company's operating results. F-8 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 -- RISK MANAGEMENT AND FINANCIAL INSTRUMENTS Dynegy's operating results are impacted by commodity price, interest rate and foreign exchange rate fluctuations. The Company routinely enters into financial instrument contracts to hedge purchase and sale commitments, fuel requirements and inventories in its natural gas, natural gas liquids, crude oil, electricity and coal businesses in order to minimize the risk of market fluctuations. However, as a result of marketplace liquidity and other factors, the Company may, at times, be unable to hedge certain identified market risks. Further, the Company may, at times, have a bias in the market, within established guidelines, resulting from the management of its commodity portfolios. Dynegy also monitors its exposure to fluctuations in interest rates and foreign currency exchange rates and may execute swaps, forward-exchange contracts or other financial instruments to manage these exposures. Operating margins in the Wholesale Gas and Power segment are separated into three integrated component businesses: wholesale gas marketing, wholesale power marketing and power generation. Operating margins earned by wholesale gas and power marketing, exclusive of risk-management activities, are relatively insensitive to commodity price fluctuations since most of the purchase and sales contracts do not contain fixed-price provisions. Generally, prices contained in these contracts are tied to a current spot or index price and, therefore, adjust directionally with changes in overall market conditions. However, market price fluctuations for natural gas and electricity can have a significant impact on the operating margin derived from risk-management activities in these businesses. Further, differences in the comprehensive methods of accounting for North American fixed-price natural gas transactions, which are accounted for under the mark-to-market method, and natural gas marketing transactions in the U.K. and power marketing transactions, which are both accounted for under accrual accounting, create differences in the timing of the recognition of such commodity price movements. Fuel costs, principally natural gas, represent the primary variable cost impacting margins at the Company's power generating facilities. Historically, operating margins have been relatively insensitive to commodity price fluctuations since most of this business's purchase and sales contracts contain variable power sales contract features tied to a current spot or index natural gas price, allowing revenues to adjust directionally with changes in natural gas prices. However, the financial performance and cash flow derived from the Company's investment in merchant generation capacity is sensitive to changes in, and the relationship between, natural gas and electricity prices. Operating margins associated with the Liquids segment's natural gas gathering, processing and fractionation activities are very sensitive to changes in natural gas liquids prices, principally as a result of contractual terms under which natural gas is processed and products are sold by these, businesses and the availability of inlet volumes. In addition, certain of the Liquids Businesses' processing plant assets are impacted by changes in, and the relationship between, natural gas and natural gas liquids prices which, in turn influences the volumes of gas processed. Commodity price fluctuations also impact the operating margins derived from the Liquids segment's natural gas liquids and crude oil marketing businesses. Dynegy's commercial groups manage, on a portfolio basis, the market risks inherent in their transactions, subject to parameters established by the Dynegy Board of Directors. Market risks are monitored by a risk control group that operates independently from the commercial units that create or actively manage these risk exposures to ensure compliance with Dynegy's risk management policies. Risk measurement is also practiced against the Dynegy portfolios with stress testing and scenario analysis. ACCOUNTING FOR PRICE RISK MANAGEMENT ACTIVITIES -- NATURAL GAS. The Company uses the mark-to-market method of accounting for its North American fixed-price natural gas transactions. Under mark-to-market accounting, fixed- price forwards, swaps, options, futures and other financial instruments with third parties are reflected at market value, net of future servicing costs and reserves, with resulting unrealized gains and losses recorded as assets and liabilities from risk management activities in the consolidated balance sheets. These assets and liabilities are affected by the actual timing of settlements related to these contracts and current-period changes resulting primarily from newly originated transactions and the impact of price movements. These changes are recognized as revenues in the consolidated statements of operations in the period in which the change occurs. Market prices used to value outstanding financial instruments reflect management's consideration of, among other things, closing exchange and over-the-counter quotations, the time value of money and volatility factors underlying the commitments. These market F-9 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS prices are adjusted to reflect the potential impact of liquidating Dynegy's position in an orderly manner over a reasonable period of time under present market conditions. MARKET RISK. Dynegy generally attempts to balance its fixed-price physical and financial purchase and sales contracts in terms of contract volumes and the timing of performance and delivery obligations. However, net open positions often exist or are established due to the origination of new transactions and the Company's assessment of, and response to, changing market conditions. Dynegy will take advantage of its bias in the market when it believes, based upon competitive information gained from its energy marketing activities, that future price movements will be consistent with its net open position. To the extent a net open position exists, Dynegy is exposed to the risk that fluctuating market prices may adversely impact its financial position or results of operations. The net open position is actively managed, and the impact of a change in price on the Company's financial condition at a point in time is not necessarily indicative of the impact of price movements throughout the year. MARKET RESERVES. In connection with the market valuation of its fixed- price contracts, the Company maintains certain reserves for a number of risks and costs associated with these future commitments. Among others, these include reserves for credit risks based on the financial condition of counterparties, reserves for product location ("basis") differentials and consideration of the time value of money for long-term contracts. Counterparties in its trading portfolio consist principally of financial institutions, major energy companies and local distribution companies. The creditworthiness of these counterparties may impact overall exposure to credit risk, either positively or negatively; however, with regard to its counterparties Dynegy maintains credit policies that management believes minimize overall credit risk. Determination of the credit quality of its counterparties is based upon a number of factors, including credit ratings, financial condition, project economics and collateral requirements. When applicable, the Company employs standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty. Based on these policies, its current exposures and its credit reserves, Dynegy does not anticipate a material adverse effect on its financial position or results of operations as a result of counterparty nonperformance. The following table displays the mark-to-market portfolio value of Dynegy's natural gas fixed-price transactions at December 31, 1998: BELOW INVESTMENT INVESTMENT GRADE GRADE CREDIT CREDIT QUALITY QUALITY TOTAL ---------------------------- ($ IN THOUSANDS) Utilities and power generators $ 47,752 $13,213 $ 60,965 Financial institutions (22,217) --- (22,217) Oil and gas producers 14,697 12,605 27,302 Industrial companies 352 5,103 5,455 Other 3,347 204 3,551 -------- ------- -------- Value of fixed-price transactions before reserves $ 43,931 $31,125 75,056 Reserves ======== ======= (6,346) -------- Net fixed-price value $ 68,710 ======== At December 31, 1998, the term of Dynegy's natural gas portfolio extends to 2007, and the average remaining life of an individual transaction was 3 months. COMPREHENSIVE CHANGE IN ACCOUNTING PRINCIPLES. As a result of recent pronouncements issued by the Financial Accounting Standards Board and the Emerging Issues Task Force, the Company's comprehensive method of accounting for energy-related contracts and/or derivative instruments and hedging transactions is changing. Previously, only North American fixed-price natural gas transactions were recorded at fair value, net of future servicing costs and reserves as estimated by the Company. The Company does not anticipate that its current mark-to-market accounting for fixed-price natural gas contracts will be significantly affected by the adoption of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement No. 133") or by the Emerging Issues Task Force's conclusions in EITF 98-10, "Accounting for Energy Trading and Risk Management F-10 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Activities" ("EITF 98-10"). However, provisions in Statement No. 133 and in EITF 98-10 will affect the accounting for other trading and marketing operations that are currently accounted for under the accrual method. Further, provisions in Statement No. 133 will affect the accounting for and disclosure of other contractual arrangements and operations of the Company. The Company is required to adopt the provisions of EITF 98-10 effective January 1, 1999. The cumulative effect of the change in accounting resulting from adoption of the provisions of EITF 98-10 is immaterial. The transition rules under Statement No. 133 provide for early adoption as of the beginning of any fiscal quarter subsequent to June 15, 1998. Dynegy intends to adopt the provisions of Statement No. 133 within the timeframe and in accordance with the requirements provided by that statement. FAIR VALUE OF FINANCIAL INSTRUMENTS. The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." The estimated fair-value amounts have been determined by the Company using available market information and selected valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair-value amounts. The carrying values of current assets and liabilities approximate fair values due to the short-term maturities of these instruments. The carrying amounts and fair values of the Company's other financial instruments were:
DECEMBER 31, ------------------------------------------------------------ 1998 1997 --------------------------- --------------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ---------- ------------ ---------- ------------ ($ IN THOUSANDS) Commercial Paper $518,643 $518,643 $229,500 $229,500 Money market lines of credit 20,000 20,000 --- --- Credit Agreement --- --- 110,000 110,000 Canadian Credit Agreement 40,000 40,000 --- --- 6.75% Senior Notes, due 2005 150,000 152,000 150,000 152,000 7.625% Senior Notes, due 2026 175,000 179,000 175,000 188,000 7.125% Senior Notes, due 2018 175,000 172,000 --- --- Power Generation Notes 103,126 103,126 --- --- Chevron Note --- --- 156,982 159,000 14% Senior Subordinated Notes, due 2001 --- --- 70,063 71,000 10.25% Subordinated Notes, due 2003 --- --- 110,234 111,000 Preferred Securities of a Subsidiary Trust 200,000 204,000 200,000 223,000 Interest rate risk-management contracts --- 8,474 --- 3,470 Foreign currency risk-management contracts 4,418 5,491 892 (375) Commodity risk-management contracts (29,222) (30,977) (23,167) (25,047)
The financial statement carrying amounts of the Company's credit agreement and variable-rate debt were assumed to approximate fair value. The fair values of the Company's other long-term indebtedness, including the Preferred Securities of a Subsidiary Trust but excluding the Chevron Note, were based on quoted market prices by financial institutions that actively trade these debt securities. The fair value of the Chevron Note was determined by comparison to publicly traded instruments having similar terms and conditions. The fair value of the Company's cost basis investments was not estimated as the investments were considered immaterial. The fair value of interest rate, foreign currency and commodity risk-management contracts were based upon the estimated consideration that would be received to terminate those contracts in a gain position and the estimated cost that would be incurred to terminate those contracts in a loss position. The interest rate swap contracts, foreign currency forward exchange contracts and commodity swap and option agreements extend for periods of up to 12, 2 and 9 years, respectively. The absolute notional contract amounts associated with the commodity risk-management, interest rate and forward exchange contracts, respectively, were as follows: F-11 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, ----------------------------------- 1998 1997 1996 ----------------------------------- Natural Gas (Trillion Cubic Feet) 4.179 2.558 1.535 Electricity (Million Megawatt Hours) 1.835 2.244 --- Natural Gas Liquids (Million Barrels) 6.397 4.355 3.270 Crude Oil (Million Barrels) 18.800 14.920 2.034 Interest Rate Swaps (in thousands of US Dollars) $ 69,332 $180,000 $ --- Fixed Interest Rate Paid on Swaps 8.067 6.603 --- U.K. Pound Sterling (in thousands of US Dollars) $ 69,254 $ 74,638 $ --- Average U.K. Pound Sterling Contract Rate (in US Dollars) $ 1.6143 $ 1.5948 $ --- Canadian Dollar (in thousands of US Dollars) $268,307 $ 37,041 $ --- Average Canadian Dollar Contract Rate (in US Dollars) $ 0.6710 $ 0.7240 $ ---
Cash-flow requirements for these commodity risk-management, interest rate and foreign exchange contracts were estimated based upon market prices in effect at December 31, 1998. Cash-flow requirements were as follows:
1999 2000 2001 2002 2003 Beyond ------ ------ ------ ------ ------ -------- ($ in thousands) Future estimated net inflows (outflows) based on year end market prices/rates $38,104 $(9,574) $(3,475) $(2,473) $ 180 $1,073 ======= ======= ======= ======= ===== ======
NOTE 3 -- CASH FLOW INFORMATION Detail of supplemental disclosures of cash flow and non-cash investing and financing information was:
Year Ended December 31, -------------------------------------------- 1998 1997 1996 -------------------------------------------- ($ in thousands) Interest paid (net of amount capitalized) $ 83,376 $ 60,323 $ 22,647 ========= ========= ========= Taxes paid (net of refunds) $ (8,000) $ 8,043 $ 1,467 ========= ========= ========= Detail of businesses acquired: Current assets and other $ 5,144 $ 547,505 $ 76,490 Fair value of non-current assets 101,630 503,789 967,575 Liabilities assumed, including deferred taxes (104,130) (268,092) (595,219) Capital stock issued and options exercised --- --- (448,132) Cash balance acquired --- (67,613) --- --------- --------- --------- Cash paid, net of cash acquired $ 2,644 $ 715,589 $ 714 ========= ========= =========
F-12 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT Investments in property, plant and equipment consisted of: DECEMBER 31, -------------------------- 1998 1997 ($ IN THOUSANDS) Wholesale Gas and Power Segment: Natural gas and power marketing $ 1,514 $ 2,588 Power generation 351,378 48,866 Liquids Segment: Natural gas processing 1,241,658 1,211,727 Fractionation 185,198 152,501 Liquids marketing 139,328 178,820 Natural gas gathering and transmission 429,631 275,116 Crude oil 43,118 44,977 Other 55,053 43,655 ---------- ---------- 2,446,878 1,958,250 Less: accumulated depreciation (514,771) (436,674) ---------- ---------- $1,932,107 $1,521,576 ========== ========== Interest capitalized related to costs of projects in process of development totaled $7.6 million, $8.8 million and $1.2 million for each of the three years in the period ended December 31, 1998. During the second quarter of 1998, the Company purchased all of the outstanding partnership interests held by third parties in three limited partnerships, each formed for the purpose of owning and operating a discrete power generation facility in the State of California. As a result, the Company now consolidates the aggregate assets, liabilities and results of operations associated with these projects. NOTE 5 -- UNCONSOLIDATED AFFILIATES The equity method of accounting is used for investments in certain partnerships and for investments in companies in which Dynegy has a voting interest between 20 percent and 50 percent. Such investments include: ACCORD ENERGY LIMITED. Accord was formed in 1994 to market energy resources in the United Kingdom and Europe. Prior to 1997, Dynegy owned a 49 percent limited partner interest in Accord. In January 1997, such interest was converted to a 25 percent participating preferred stock interest. NICOR ENERGY, L.L.C. ("NICOR"). NICOR is a retail energy alliance formed with NICOR Energy Management Services, a subsidiary of NICOR Inc., to provide energy services to industrial, commercial and residential customers in the Midwest. Dynegy owns a 50 percent interest in this Delaware limited liability company. SOUTHSTAR ENERGY SERVICES L.L.C. SouthStar is a retail energy alliance formed with AGL Resources Inc. and Piedmont Natural Gas Company. The company offers a combination of unregulated energy products and services to industrial, commercial and residential customers in the southeast. Dynegy owns a 20 percent interest in this Delaware limited liability company. POWER GENERATION PARTNERSHIPS. Dynegy owns interests in fifteen joint ventures, each formed to build, own and operate cogeneration facilities. The Company's interests in these joint ventures range from eight to 50 percent. Each partnership interest is accounted for under the equity method. Construction of the cogeneration facilities owned by each of the joint ventures was project financed and the obligations of the joint ventures are non-recourse to the Company. At December 31, 1998, the unamortized excess of the Company's investment in these joint ventures over its equity in the F-13 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS underlying net assets of the affiliates approximated $160 million. This amount is being amortized on the straight-line method over the estimated economic service lives of the underlying assets. QUICKTRADE L.L.C. ("QUICKTRADE"). Quicktrade, a Delaware limited liability company, was formed to develop, implement and operate an electronic trading system. Dynegy owned a 65.5 percent interest in this LLC during 1998 and the LLC was consolidated in the accompanying financial statements during 1998. During 1996 and 1997, the Company owned varying interests in Quicktrade and accounted for its interest under the equity method for the majority of those years. Effective January 1, 1999, the Company sold its interest in Quicktrade. GULF COAST FRACTIONATORS ("GCF"). GCF is a Texas limited partnership that owns and operates a natural gas liquids fractionation facility located in Mont Belvieu, Texas. Dynegy owns a 38.75 percent limited partner interest in GCF. At December 31, 1998, the unamortized excess of the Company's investment in GCF over its equity in the underlying net assets of the affiliate approximated $16 million. This amount is being amortized on the straight-line method over the estimated economic service life of the GCF assets. WEST TEXAS LPG PIPELINE PARTNERSHIP ("WEST TEXAS PARTNERSHIP"). The West Texas Partnership, a Texas limited partnership, holds all of the assets comprising the West Texas Pipeline, an interstate natural gas liquids pipeline. Dynegy owns a 49 percent interest in the West Texas Partnership acquired as part of the Chevron Combination. At December 31, 1998, the unamortized excess of the Company's investment in the West Texas Partnership over its equity in the underlying net assets of the affiliate approximated $43 million. This amount is being amortized on the straight-line method over the estimated economic service life of the underlying assets. VENICE ENERGY SERVICES COMPANY, L.L.C. ("VESCO"). VESCO is a Delaware limited liability company that owns and operates a natural gas processing, extraction, fractionation and storage facility located in Plaquemines Parish, Louisiana. Dynegy is operator of the facility and originally acquired a 37 percent interest in Venice Gas Processing Company ("Venice") effective November 1, 1996. In 1997, Venice reorganized as a limited liability company and, in September 1997, the VESCO members agreed to expand ownership in VESCO to include an affiliate of Shell Midstream Enterprises, a subsidiary of Shell Oil Company ("Shell"), effective September 1, 1997, in exchange for Shell's commitment of certain offshore reserves to VESCO. The transaction reduced Dynegy's interest in VESCO from 37 percent to approximately 32 percent, as of the effective date. Koch Energy Services Company ("Koch") acquired an interest in VESCO during 1998 pursuant to its contribution of a cryogenic gas-processing unit to VESCO. The transaction reduced Dynegy's interest in VESCO to approximately 23 percent. Dynegy operates the facility and has commercial responsibility for product distribution and sales. WASKOM GAS PROCESSING COMPANY ("WASKOM"). Waskom is a Texas general partnership that owns and operates a natural gas processing, extraction and fractionation facility located in Henderson County, Texas. Dynegy owns a 33.33 percent in Waskom. Dynegy operates the facility and has commercial responsibility for product distribution and sales. BARGE CO. Barge Co., a Delaware limited liability company, owns pressurized LPG barges used in transporting LPGs principally in the Gulf of Mexico. Dynegy owns a 25 percent interest in Barge Co. At December 31, 1998, the unamortized excess of the Company's investment in Barge Co. over its equity in the underlying net assets of the affiliate approximated $10 million. This amount is being amortized on the straight-line method over the estimated economic service lives of the underlying assets. Aggregate equity method investment at December 31, 1998, 1997 and 1996, was $498.5 million, $466.4 million and $177.8 million, respectively. Dividends received on these investments during each of the three years in the period ended December 31, 1998, totaled $84.0 million, $63.6 million and $7.3 million, respectively. Summarized aggregate financial information for these investments and Dynegy's equity share thereof was: F-14 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, ------------------------------------------------------------------------------------------------ 1998 1997 1996 ------------------------------------------------------------------------------------------------ Total Equity Share Total Equity Share Total Equity Share --------- -------------- --------- --------------- -------- --------------- ($ in thousands) Current assets (1)(2) $ 324,462 $131,169 $ 283,787 $112,895 $ 93,949 $ 35,321 Non-current assets (1)(2) 1,983,731 803,333 1,830,106 736,667 324,210 122,882 Current liabilities (1)(2) 292,481 124,016 202,754 86,476 30,459 11,893 Non-current liabilities (1)(2) 1,160,639 485,673 1,249,874 521,691 47,250 18,309 Operating margin (1)(2)(3) 397,391 159,288 209,877 86,154 37,296 14,500 Net income (1)(2)(3) 157,054 68,706 83,601 33,799 19,024 7,360
1. The financial data for all periods presented is exclusive of amounts attributable to the Company's investment in Accord as disclosure data was unavailable for the current period. Dynegy's share of Accord earnings for each of the three years in the period ended December 31, 1998, totaled $21.8 million, $25.9 million and $18.0 million, respectively. 2. The financial data for all periods presented is exclusive of amounts attributable to the Company's investment in NCL as such information was not comparable period-to-period, as a result of the NCL restructuring. Dynegy sold its interest in NCL effective April 1, 1997. Dynegy's share of NCL's loss for the three months ended March 31, 1997, totaled $892,000. Dynegy's share of NCL's earnings for the year ended December 31, 1996 totaled $3.6 million. 3. Equity earnings derived from investments acquired in the Destec acquisition accrue to Dynegy commencing July 1, 1997. The cost method of accounting is generally used to account for investment in partnerships or companies in which Dynegy has a voting interest of less than 20 percent. At December 31, 1998, the Company had two cost basis investments: Indeck North American Power Fund, L.P. and Indeck North American Power Partners, L.P. (collectively "Indeck"). Indeck is engaged in the acquisition and operation of electric power generating facilities. Dynegy's aggregate investment in these entities totaled $4.1 million and $4.0 million at December 31, 1998 and 1997, respectively, and Dynegy received an aggregate $0.5 million, $0.5 million and $0.6 million of dividends from Indeck during each of the three years in the period ended December 31, 1998. NOTE 6 -- LONG-TERM DEBT DECEMBER 31, ----------------------------------- 1998 1997 ---------- ---------- ($ IN THOUSANDS) Commercial Paper $ 518,643 $ 229,500 Money market lines of credit 20,000 --- Credit Agreement --- 110,000 Canadian Credit Agreement 40,000 --- 6.75% Senior Notes, due 2005 150,000 150,000 7.625% Senior Debentures, due 2026 175,000 175,000 7.125% Senior Debentures, due 2018 175,000 --- Power Generation Notes 103,126 --- Chevron Note --- 155,373 14% Senior Subordinated Notes, due 2001 --- 65,000 10.25% Subordinated Notes, due 2003 --- 105,000 Other, non-interest bearing 275 550 Unamortized premium --- 11,906 ---------- ---------- 1,182,044 1,002,329 Less: long-term debt due within one year 135,154 275 ---------- ---------- $1,046,890 $1,002,054 ========== ========== F-15 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMERCIAL PAPER AND MONEY MARKET LINES OF CREDIT. The Company utilizes commercial paper proceeds and borrowings under uncommitted money market lines of credit for general corporate purposes, including short-term working capital requirements. The commercial paper program is for amounts up to $800 million, as supported by existing credit agreements. Weighted average interest rates on amounts outstanding under the commercial paper program were 6.1 percent and 6.8 percent at December 31, 1998 and 1997, respectively. Amounts outstanding under the uncommitted money market lines of credit bore interest at an average rate of 6.0 percent at December 31, 1998. The Company classifies outstanding commercial paper and borrowings under money market lines of credit as long-term debt to the extent of availability under existing committed credit facilities, as management's intent is to maintain these obligations for longer than one year, subject to an overall reduction in corporate debt levels. CREDIT AGREEMENTS. In May 1998, Dynegy refinanced its then existing revolving credit agreement with a $400 million, five-year revolving credit agreement that matures May 27, 2003, and a $400 million, 364-day revolving credit agreement maturing in May, 1999 (the "Credit Agreements"). The Credit Agreements provide funding for letters of credit, working capital, capital expenditures and general corporate purposes, including commercial paper support. The Credit Agreements also require payment of various costs and fees, including an annual fee of 0.09 percent of the committed amount under the Credit Agreements. Generally, borrowings under the Credit Agreements bear interest at a Eurodollar rate plus a margin that is determined based on the Company's unsecured senior debt rating. At December 31, 1998, such margin was 0.21 percent. Financial covenants in the Credit Agreements are limited to a debt to capitalization test. Letters of credit under the Credit Agreements aggregated approximately $27 million at December 31, 1998. The Company maintains an additional $240 million, 364-day revolving credit facility having a current maturity date of December 17, 1999. The facility provides funding for general corporate purposes. The facility also requires payment of various costs and fees, including an annual fee of 0.125 percent of the committed amount under the facility. Generally, borrowings under the facility bear interest at a Eurodollar rate plus a margin that is determined based on the Company's unsecured senior debt rating. At December 31, 1998, such margin was 0.525 percent. Financial covenants are limited to a debt to capitalization test. No amounts were outstanding under this agreement at December 31, 1998. After consideration of the outstanding commercial paper, the unused borrowing capacity under the Credit Agreements and additional 364-day facility approximated $495 million at December 31, 1998. CANADIAN CREDIT AGREEMENT. In November 1998, an indirect wholly owned Canadian subsidiary of the Company entered into a $60 million, two-year revolving credit facility, which matures on November 24, 2000 (the "Canadian Credit Agreement"). The Canadian Credit Agreement provides funding for general corporate purposes. The Canadian Credit Agreement requires payment of various costs and fees, including an annual fee of 0.25 percent of the committed amount under the Canadian Credit Agreement. Generally, borrowings under the Canadian Credit Agreement bear interest at a Eurodollar rate plus a margin that is determined based on the Company's unsecured senior debt rating. At December 31, 1998, such margin was 0.40 percent. The Canadian subsidiary's obligations under the Canadian Credit Agreement are fully and unconditionally guaranteed by the Company. At December 31, 1998, outstanding amounts under the facility totaled $40.0 million, at an average interest rate of 6.09 percent. 6.75% SENIOR NOTES DUE 2005. In December 1995, the Company sold $150 million of 6.75 percent Senior Notes due December 15, 2005 ("Senior Notes"). The Senior Notes were issued at a price of 99.984 percent, which, after deducting underwriting discounts and commissions, resulted in net proceeds to the Company of approximately $149 million. Proceeds from the sale of the Senior Notes were used to repay a portion of the outstanding indebtedness under the then existing revolving credit agreement. Interest on the Notes is payable semiannually on June 15 and December 15 of each year. Upon issuance, the Senior Notes were priced based on the then existing yield for 10-year U.S. Treasury Notes ("10- Year Base Treasury Rate") plus a spread based principally on the Company's credit rating. Prior to issuing the Senior Notes, the Company entered into two separate transactions with two separate financial institutions, the effect of which was to lock in the 10-Year Base Treasury Rate at approximately 6.2 percent on the full $150 million face value of the Senior Notes. F-16 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7.625% SENIOR DEBENTURES DUE 2026. In October 1996, Dynegy sold $175 million of 7.625 percent Senior Debentures due October 15, 2026 ("Senior Debentures"). The Senior Debentures were issued at a price of 99.522 percent, which, after deducting underwriting discounts and commissions, resulted in net proceeds to the Company of approximately $173 million. The net proceeds from the sale of such Senior Debentures were used to repay a portion of the outstanding indebtedness under the then existing revolving credit agreement. Interest on the Senior Debentures is payable semiannually on April 15 and October 15 of each year. The Senior Debentures are redeemable, at the option of the Company, in whole or in part from time to time, at a formula based redemption price as defined in the associated indenture. Upon issuance, the Senior Debentures were priced based on the then existing yield for 30-year U.S. Treasury Notes ("30- Year Base Treasury Rate") plus a spread based principally on the Company's credit rating. Prior to issuing the Senior Debentures, the Company entered into a transaction, the effect of which was to lock in the 30-Year Base Treasury Rate at approximately 7.0 percent on $150 million of the $175 million face value of the Senior Debentures. In February 1998, the Company completed an amendment to the then existing revolving credit agreement and the filing of supplemental indentures to each of the Senior Debentures and Senior Notes, the effect of which was to eliminate all clauses, provisions and terms in such documents requiring certain wholly owned subsidiaries of the Company to fully and unconditionally guarantee, on a joint and several basis, the obligations of the Company under such credit agreement, debentures and notes, respectively. 7.125% SENIOR DEBENTURES DUE 2018. In May 1998, Dynegy sold $175 million of 7.125 percent Senior Debentures due May 15, 2018 ("Debentures"). The Debentures were issued at a price of 99.654 percent, which, after deducting underwriting discounts and commissions, resulted in net proceeds of approximately $173 million. Proceeds from the sale of the Debentures were used to retire short-term debt incurred in connection with the redemption of certain high-cost debt discussed below. Interest on the Debentures is payable semiannually on May 15 and November 15 of each year. The Debentures are redeemable, at the option of the Company, in whole or in part from time to time, at a formula based redemption price as defined in the associated indenture. Upon issuance, the Debentures were priced based on the then existing 30-Year Base Treasury Rate plus a spread based principally on the Company's credit rating. Prior to issuing the Debentures, the Company entered into a series of transactions, the effect of which was to lock in the 30-Year Base Treasury Rate at approximately 6.0% on $148 million of the $175 million face value of the Debentures. POWER GENERATION NOTES. Included in the December 31, 1998 consolidated long-term debt balance was $103.1 million representing the aggregate principal balance outstanding under three separate notes, each having recourse only to the assets of one of the three power generation projects acquired in 1998 as described in Note 4. Each of the three notes represents a fifteen-year term loan obligation payable in semi-annual installments of principal plus accrued interest. Each note bears interest at a base rate plus a margin, as defined in each agreement. Interest rate swaps effectively fix the base rate on $69.3 million of the indebtedness at a weighted average rate of 8.067 percent. RETIRED DEBT. During 1998, the Company retired the 14 percent Senior Subordinated Notes, the 10.25 percent Subordinated Notes and the Chevron Note. The retirement of these notes was funded through a combination of borrowings under existing credit agreements and the sale of commercial paper. There was no financial gain or loss related to these retirements. Aggregate maturities of all long-term indebtedness are: 1999 - $135.2 million; 2000 - $40.0 million; 2001 - none; 2002 - none; 2003 and beyond - $1.0 billion. F-17 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 -- INCOME TAXES The Company is subject to U.S. federal, foreign and state income taxes on its operations. Components of income tax expense (benefit) were: Year Ended December 31, ------------------------------------ 1998 1997 1996 -------- --------- -------- ($ in thousands) Current tax expense (benefit): Domestic $ (608) $ 13,230 $ 10,427 Foreign (1,362) 3,071 --- Deferred tax expense (benefit): Domestic 44,565 (81,306) 45,510 Foreign 7,743 2,795 386 ------- -------- -------- Income tax provision (benefit) $50,338 $(62,210) $ 56,323 ======= ======== ======== Components of income (loss) before income taxes was as follows: Year Ended December 31, ------------------------------------ 1998 1997 1996 -------- --------- -------- ($ in thousands) Income (loss) before income taxes: Domestic $133,867 $(180,127) $150,705 Foreign 24,824 30,232 18,940 -------- --------- -------- $158,691 $(149,895) $169,645 ======== ========= ======== Deferred income taxes are provided for the temporary differences between the tax basis of Dynegy's assets and liabilities and their reported financial statement amounts. Significant components of deferred tax liabilities and assets were: December 31, ---------------------- 1998 1997 -------- -------- ($ in thousands) Deferred tax assets: Clearinghouse partnership basis differential $ 990 $ 19,211 Loss carryforward 132,445 76,885 Tax credits 10,798 23,162 Other --- 8,499 144,233 127,757 -------- -------- Valuation allowance --- --- -------- -------- 144,233 127,757 -------- -------- Deferred tax liabilities: Items associated with capitalized costs 461,770 381,816 -------- -------- Net deferred tax liability $317,537 $254,059 ======== ======== Realization of the aggregate deferred tax asset is dependent on the Company's ability to generate taxable earnings in the future. There was no valuation allowance established at December 31, 1998 or 1997, as management believes the aggregate deferred asset is more likely than not to be fully realized in the future. F-18 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income tax provision (benefit) for the years ended December 31, 1998, 1997 and1996, was equivalent to effective rates of 32 percent, (41) percent and 33 percent, respectively. Differences between taxes computed at the U.S. federal statutory rate and the Company's reported income tax provision (benefit) were: Year Ended December 31, --------------------------------- 1998 1997 1996 ------- -------- ------- ($ in thousands) Expected tax at U.S. statutory rate $55,444 $(52,463) $59,376 State taxes 2,564 (3,676) 3,393 Foreign tax benefit (2,300) (5,415) (6,621) Basis differentials and other (5,370) (656) 175 ------- -------- ------- Income tax provision (benefit) $50,338 $(62,210) $56,323 ======= ======== ======= At December 31, 1998, the Company had approximately $358 million of regular tax net operating loss carryforwards. The net operating loss carryforwards expire from 2006 through 2012. Certain provisions of the Internal Revenue Code place an annual limitation on the Company's ability to utilize tax carryforwards existing as of the date of a 1995 business acquisition. Management believes such carryforwards will be fully realized prior to expiration. NOTE 8 -- COMPANY OBLIGATED PREFERRED SECURITIES OF A SUBSIDIARY TRUST In May 1997, NGC Corporation Capital Trust I ("Trust") issued, in a private transaction, $200 million aggregate liquidation amount of 8.316% Subordinated Capital Income Securities ("Trust Securities") representing preferred undivided beneficial interests in the assets of the Trust. The Trust invested the proceeds from the issuance of the Trust Securities in an equivalent amount of 8.316% Subordinated Debentures ("Subordinated Debentures") of the Company. The sole assets of the Trust are the Subordinated Debentures. The Trust Securities are subject to mandatory redemption in whole but not in part on June 1, 2027, upon payment of the Subordinated Debentures at maturity, or in whole but not in part at any time, contemporaneously with the optional prepayment of the Subordinated Debentures, as allowed by the associated indenture. The Subordinated Debentures are redeemable, at the option of the Company, in whole at any time or in part from time to time, at formula-based redemption prices, as defined in the indenture. The Subordinated Debentures represent unsecured obligations of the Company and rank subordinate and junior in right of payment to all Senior Indebtedness to the extent and in the manner set forth in the associated indenture. The Company has irrevocably and unconditionally guaranteed, on a subordinated basis, payment for the benefit of the holders of the Trust Securities the obligations of the Trust to the extent the Trust has funds legally available for distribution to the holders of the Trust Securities, as described in the indenture ("Guarantee"). Distributions on the Trust Securities are payable each June 1 and December 1, coinciding with the interest payment due dates on the Subordinated Debentures, and are classified in the accompanying Statement of Operations as "minority interest in income of a subsidiary." The periodic distributions accruing at an annual rate of 8.316 percent of the aggregate liquidation amount are recorded as minority interest in income of a subsidiary in the Company's consolidated statement of operations. So long as no Debenture Event of Default, as defined, has occurred and continues, the Company has the right to defer the payment of interest on the Subordinated Debentures for any Extension Period elected by the Company, which period cannot extend beyond 10 consecutive semi-annual periods, end on a date other than an Interest Payment Date or extend beyond the Stated Maturity Date. During October 1997, the Trust completed an exchange offer through which all of the outstanding Trust Securities were exchanged by the holders thereof for registered securities having substantially the same rights and obligations. Note 9 -- COMMITMENTS AND CONTINGENCIES Litigation. On April 17, 1997, Pacific Gas and Electric Company ("PG&E") filed a lawsuit in the Superior Court of the State of California, City and County of San Francisco, against Destec, Destec Holdings, Inc. and Destec Operating Company (wholly-owned subsidiaries of the Company now known respectively as Dynegy Power Corp., F-19 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dynegy Power Holdings, Inc. and Dynegy Operating Company) as well as against San Joaquin CoGen Limited ("San Joaquin" or the "Partnership") and its general partners (collectively the "Dynegy Defendants"). Dynegy Power Corp. and its affiliates now own all of the partnership interests in the Partnership as a result of the purchase of the interests of the two outside partners in the Partnership. In the lawsuit, PG&E asserts claims and alleges unspecified damages for fraud, negligent misrepresentation, unfair business practices, breach of contract and breach of the implied covenant of good faith and fair dealing. PG&E alleges that due to the insufficient use of steam by San Joaquin's steam host, the Partnership did not qualify as a cogenerator pursuant to the California Public Utilities Code ("CPUC") Section 218.5, and thus was not entitled under CPUC Section 454.4 to the discount the Partnership received under gas transportation agreements entered into between PG&E and San Joaquin in 1989, 1991, 1993 and 1995. All of PG&E's claims in this suit arise out of the Partnership's alleged failure to comply with CPUC Section 218.5. The defendants filed a response to the suit on May 15, 1997. On October 20, 1997, PG&E named Libbey-Owens-Ford ("LOF"), the Partnership's steam host, as an additional defendant in the action. On February 23, 1998, PG&E served its Second Amended Complaint on all defendants. On March 30, 1998, the defendants filed their response to PG&E's Second Amended Complaint, denying PG&E's allegations and alleging certain counterclaims against PG&E. By Order dated July 20, 1998, the court dismissed certain of defendants' counterclaims against PG&E, and abated certain others, pending resolution by the CPUC. The trial date is currently June 15, 1999. The Partnership has previously advised the FERC of PG&E's claims, and stated that it would submit any appropriate filings upon completion of its investigation. If the facility was found not to have satisfied the California cogeneration facility standards, there is a strong likelihood that it would also fail to satisfy the more stringent federal standards. In accordance with the terms of a Protective Order entered into by the parties at the commencement of the litigation, PG&E has notified San Joaquin that it may make a FERC filing seeking damages from San Joaquin and decertification of its status as a qualifying facility under the federal standards. Under FERC precedent, if the San Joaquin facility were found not to have been a qualifying facility, San Joaquin could be required to refund to PG&E payments it received pursuant to the Power Purchase Agreement in excess of PG&E's short-term energy costs during the period of non-compliance, plus interest. In the event the court or FERC were to determine that San Joaquin is liable to PG&E under the Gas Transportation Agreement or Power Purchase Agreement due to LOF's failure to use sufficient quantities of steam, San Joaquin will seek to recover such amounts from LOF under the terms of the Steam Purchase Agreement between San Joaquin and LOF. The parties have been actively engaged in settlement discussions, which resulted in the execution of a Termination and Settlement Agreement between PG&E and the Dynegy Defendants on March 9, 1999 (the "Settlement Agreement"). The Settlement Agreement provides for, upon the receipt of CPUC approval, a dismissal with prejudice of PG&E's claims against the Dynegy Defendants, a release by PG&E of all claims relative to FERC matters and a termination of the San Joaquin power purchase agreement as of December 31, 1999, whereupon the San Joaquin facility will continue to operate as a merchant plant. The Dynegy Defendants will seek to recover from LOF any losses resulting from the settlement with PG&E. However, if the settlement is not ultimately concluded, the Dynegy Defendants will seek to recover from LOF any losses or amounts for which it may be found liable. Further, the Company's subsidiaries intend to continue to vigorously defend this action. In the opinion of management, the ultimate resolution of this lawsuit will not have a material adverse effect on the Company's financial position or results of operations. On March 24, 1995, Southern California Gas Company ("SOCAL") filed a lawsuit in the Superior Court of the State of California for the County of Los Angeles, against Destec, Destec Holdings and Destec Gas Services, Inc. (now known respectively as Dynegy Power Corp., Dynegy Holdings, Inc. and Dynegy Gas Services, Inc.), wholly-owned direct and indirect subsidiaries of the Company (collectively, the "Defendants"), as well as against Chalk Cliff Limited and McKittrick Limited (collectively, the "Partnerships"). The Company owns an indirect 50 percent limited partnership interest in McKittrick Limited, and Chalk Cliff Limited is now wholly owned by subsidiaries of the Company through the purchase of the interests of Dominion Energy, Inc. All general partners of the Partnerships are also named defendants. The lawsuit alleged breach of contract against the Partnerships and their respective general partners, and interference and conspiracy to interfere with contracts against the Defendants. The breach of contract claims arose out of the "transport-or-pay" provisions of the gas transportation service agreements between the Partnerships and SOCAL. SOCAL sought damages from the Partnerships for past damages and anticipatory breach damages in an amount equal to approximately $31,000,000. On October 24, 1997, the Court granted SOCAL's Motion for Summary Judgment relating to the breach of contract causes of action against the Partnerships and their respective general partners, and requested that SOCAL submit a proposed order consistent with that ruling for the Court's signature. On November 21, 1997, the Partnerships filed for voluntary Chapter 11 bankruptcy protection in the Eastern District of California. Normal business F-20 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS operations by the Partnerships continued throughout the course of these reorganization proceedings. On January 12, 1998, the Court entered a Final Order that (a) severed out the Partnerships due to their Chapter 11 bankruptcy filings, (b) included a finding of contract liability against the Defendants, (c) dismissed the tortious interference claims against the Defendants, and (d) assessed damages in an aggregate amount of approximately $31,000,000. On the same day, the Defendants filed their Notice of Appeal, and posted a security bond with the Second Appellate District in Los Angeles based on the lack of allegations made or proven by SOCAL which support holding those entities liable in contract. On March 11, 1998, the Partnerships and their respective general partners filed Notices of Appeal with respect to certain findings of fact in the Court's January 12, 1998 Final Order that were adverse to those defendants. On or about April 15, 1998, the Court entered a final judgment against the Partnerships themselves in recognition of the lifting of the automatic stay against those entities by the Bankruptcy Court. The Partnerships filed their appeal of that final judgment on June 4, 1998. On October 21, 1998, the Bankruptcy Court dismissed the voluntary bankruptcy filings of the Partnerships and their respective lenders thereafter notified each of the Partnerships of the occurrences of an Event of Default under the Partnerships' respective credit agreements due to the existence of the SOCAL judgment against them, and have instituted foreclosure proceedings as to the projects. Additionally, receivers were named by the lenders and approved by the Court for each of the projects. In early December 1998, the defendants filed their opening appellate briefs in the appeal of the Court's final judgment. On February 23, 1999, the Court granted a motion by SOCAL to amend the Court's final judgment to include a finding that Dynegy Power Corp. is the alter ego of the Partnerships and their respective general partners. Dynegy Power Corp. will appeal the Court's ruling, and will vigorously defend SOCAL's claims. The PG&E and SOCAL litigations represent pre-acquisition contingencies acquired by the Company in the Destec Acquisition. In a related matter, Chalk Cliff and San Joaquin have each guaranteed the obligations of the other partnership, represented by the project financing loans used to construct the power generation facilities owned by the respective Partnerships. In the opinion of management, the election by the lender of its option under the terms of such arrangements would not have a material adverse effect on the Company's financial position or results of operations. On August 3, 1998, Modesto Irrigation District ("MID") filed a lawsuit against PG&E and Destec in federal court for the Northern District of California, San Francisco division. The lawsuit alleges violation of federal and state antitrust laws and breach of contract against Destec. The allegations are related to a power sale and purchase arrangement in the city of Pittsburg, CA. MID seeks actual damages from PG&E and Destec in amounts not less than $25 million. MID also seeks a trebling of any portion of damages related to its antitrust claims. By order dated February 2, 1999, the federal District Court dismissed MID's state and federal antitrust claims against PG&E and Destec; however, the Court granted MID leave of thirty days to amend its complaint to state an antitrust cause of action. On March 3, 1999, MID filed an amended complaint recasting its federal and state antitrust claims against PG&E and Destec and restating its breach of contract claim against Destec. Dynegy believes the allegations made by MID are meritless and will continue to vigorously defend MID's claims. In the opinion of management, the amount of ultimate liability with respect to these actions will not have a material adverse effect on the financial position or results of operations of the Company. The Company assumed liability for various claims and litigation in connection with the Chevron Combination, the Trident Combination, the Destec Acquisition and in connection with the acquisition of certain gas processing and gathering facilities from Mesa Operating Limited Partnership. The Company believes, based on its review of these matters and consultation with outside legal counsel, that the ultimate resolution of such items will not have a material adverse effect on the Company's financial position or results of operations. Further, the Company is subject to various legal proceedings and claims, which arise in the normal course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not have a material adverse effect on the financial position or results of operations of the Company. COMMITMENTS. In conducting its operations, the Company routinely enters into long-term commodity purchase and sale commitments, as well as agreements that commit future cash flow to the lease or acquisition of assets used in its businesses. These commitments are typically associated with capital projects, reservation charges associated with firm transmission, transportation and storage capacity, lease agreements for ship charters and other distribution assets and leases for office space, equipment and other similar items. The following describes the more significant commitments outstanding at December 31, 1998. F-21 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A subsidiary of the Company has entered into binding agreements committing the Company to expend approximately $14 million for the acquisition of combustion turbine generators and related equipment. This equipment will be used in the construction of electricity generating capacity in selected sites throughout the U.S. A significant portion of the current commitment relates to agreements that include cancellation provisions providing for termination at Dynegy's option during the construction phase in exchange for variable penalty payments. In 1997, Dynegy received cash from a gas purchaser as an advance payment for future natural gas deliveries over a ten-year period ("Advance Agreement"). As a condition of the Advance Agreement, Dynegy entered into a natural gas swap with a third party under which Dynegy became a fixed-price payor on identical volumes to those to be delivered under the Advance Agreement at prices based on then current market rates. The cash payment was classified as an advance on the balance sheet and is ratably reduced as gas is delivered to the purchaser under the terms of the Advance Agreement. In addition, the purchaser pays a monthly fee to Dynegy associated with delivered volumes. The Advance Agreement contains certain non-performance penalties that impact both parties and as a condition precedent, Dynegy purchased a surety bond in support of its obligations under the Advance Agreement. For a two-year period beginning January 1, 1998, the Company contracted for 1.3 billion cubic feet per day of firm transportation capacity to California on the El Paso Natural Gas pipeline system. Pursuant to this arrangement, Dynegy is obligated to pay a minimum of $38 million of reservation charges during 1999. A wholly owned subsidiary of the Company leases certain power generating assets under agreements that are classified as operating leases. These agreements have aggregate future minimum lease payments of approximately $432 million at December 31, 1998. Minimum commitments in connection with office space, equipment, reservation charges under purchase and firm transportation contracts, power generating and other leased assets were: 1999 - $134.4 million; 2000 - $232.6 million; 2001 - $239.0 million; 2002 - $29.0 million; and 2003 and beyond - $99.6 million. Rental payments made under the terms of these arrangements totaled - $126.1 million in 1998, $85.2 million in 1997 and $45.2 million in 1996. NOTE 10 -- CAPITAL STOCK The Company has authorized capital stock consisting of 450,000,000 shares, of which 50,000,000 shares, par value $0.01 per share, are designated preferred stock and 400,000,000 shares, par value $0.01 per share, are designated common stock. PREFERRED STOCK. The Company's preferred stock may be issued from time to time in one or more series, the shares of each series to have such designations and powers, preferences, rights, qualifications, limitations and restrictions thereof as described in the Company's Certificate of Incorporation. In order to provide for issuance of preferred shares pursuant to the terms of the Chevron Combination, 8,000,000 shares of preferred stock were designated during 1996 as Dynegy Series A Participating Preferred Stock ("Series A Preferred"), of which 7,815,363 shares were issued effective September 1, 1996. Except as provided by law, the holders of the Series A Preferred have no voting rights and such shares are not redeemable. At the holders option, each share of the Series A Preferred may be converted, subject to certain adjustments and certain defined conditions precedent, into one share of Dynegy common stock. Such shares have certain preferences, as defined, in the event of liquidation or dissolution of Dynegy over all stock having a junior ranking. Subject to certain anti-dilutive adjustments, as defined, the holders of the Series A Preferred are entitled to receive dividends or distributions equal per share in amount and kind to any dividend or distribution payable on shares of the Company's common stock, when and as the same are declared by the Company's Board of Directors out of funds legally available therefor and paid to the holders of the Company's common stock. Beginning in the third quarter of 1996, the Company paid quarterly cash dividends on the Series A Preferred of $0.0125 per share, or $0.05 per share on an annual basis. F-22 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMON STOCK. At December 31, 1998, there were 153,298,220 shares of common stock issued. Dynegy pays quarterly cash dividends on common stock of $0.0125 per share, or $0.05 per share on an annual basis. In May 1997, the Board of Directors approved a stock repurchase program that allows the Company to repurchase, from time to time, up to 1.6 million shares of common stock in open market transactions. The timing and number of shares ultimately repurchased will depend upon market conditions and consideration of alternative investments. Pursuant to this program, the Company has acquired 1,200,700 shares at a total cost of $17.4 million, or $14.50 per share on a weighted average cost basis, through December 31, 1998. STOCK WARRANTS. At December 31, 1998, the Company had warrants outstanding that entitle the holder thereof to purchase an aggregate 6,228 shares of common stock at an exercise price of $8.13 per share. The warrants expire in October 2003. STOCK OPTIONS. Each option granted is valued at an option price, which ranges from $2.03 per share to the fair market value per share at date of grant. The difference between the option price and the fair market value, if any, of each option on the date of grant is recorded as compensation expense over a vesting period. Options granted at prices below fair market do not become exercisable until the fifth anniversary date of the grant, at which time they become fully exercisable. Options granted at market value vest and become exercisable ratably over a three-year period. The average exercise price of vested options at December 31, 1998 was $2.69. Compensation expense related to options granted totaled $4.7 million, $4.0 million and $2.8 million for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, employee stock options aggregating 4.4 million shares were exercisable at prices ranging from $2.03 to $21.63 per share. Employee stock option grants made from 1994 to 1998 will become exercisable during 1999 and 2000, respectively, resulting in the potential exercise of approximately 9.6 million options during that two-year period, at exercise prices ranging from $2.03 to $21.63. Other options currently granted under the Company's option plans will fully vest periodically and become exercisable through the year 2003 at prices ranging from $2.03 to $21.63. Grants made under the Company's option plans may be canceled under certain circumstances as provided in the plans. While the Company cannot predict the timing or the number of shares which may be issued upon the exercise of option grants by individual employees, the Company is pursuing a variety of alternatives to help assure an orderly distribution of shares which may become available to the market. Stock option transactions for 1998, 1997 and 1996 were (shares in thousands):
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------------- 1998 1997 1996 -------------------------- -------------------------- -------------------------- SHARES OPTION PRICE SHARES OPTION PRICE SHARES OPTION PRICE ------- ------------- ------- ------------- ------- ------------- Outstanding at beginning of period 14,015 $2.03 - 21.63 13,920 $2.03 - 18.75 12,615 $ 2.03 - 9.38 Granted 7,319 2.03 - 17.50 2,284 2.03 - 21.63 1,842 2.03 - 18.75 Exercised (995) 2.03 - 9.38 (1,469) 2.03 - 9.38 (737) 2.03 - 9.38 Canceled or expired (1,568) 2.03 - 19.00 (629) 2.03 - 18.75 (313) 2.03 - 9.38 Other, contingent share issuance (92) 2.03 - 5.66 (91) 2.03 - 5.66 513 2.03 - 8.13 ------- ------------- ------- ------------- ------- ------------- Outstanding at end of period 18,679 $2.03 - 21.63 14,015 $2.03 - 21.63 13,920 $2.03 - 18.75 ======= ============= ======= ============= ======= ============= Exercisable at end of period 4,394 $2.03 - 21.63 2,861 $2.03 - 18.75 469 $2.03 - 9.38 ======= ============= ======= ============= ======= ============= Weighted average fair value of Options granted during the period At market $ 5.77 $ 11.14 $ 15.30 ============= ============= ============= Weighted average fair value of Options granted during the period At below market $ 7.35 $ 14.63 $ 21.38 ============= ============= =============
F-23 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted- average assumptions used for grants in 1998, 1997 and 1996: dividends per year of $0.05 per annum for all years; expected volatility of 40.1 percent, 42.0 percent and 43.3 percent, respectively; risk-free interest rate of 6.28 percent, 6.28 percent and 5.9 percent, respectively; and an expected life of 10 years for all periods. The Company accounts for its stock option plan in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had compensation cost been determined consistent with SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company's net income (loss) and per share amounts would have approximated the following pro forma amounts for the years ended December 31, 1998, 1997 and 1996, respectively.
Years Ended December 31, ---------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------- --------------------------- -------------------------- Diluted Loss Diluted Net Income EPS Net Loss Per Share Net Income EPS ------------ --------- ---------- ----------- ------------ ---------- ($ in thousands, except per share data) Pro forma amounts $104,578 $0.63 $(108,007) $(0.72) $107,580 $0.79 ======== ===== ========= ====== ======== =====
As allowed by the transitional disclosure requirements of SFAS No. 123, the preceding pro forma net income and pro forma EPS amounts do not include the impact, if any, of applying the accounting methodology of SFAS No. 123 to options granted prior to January 1, 1995. As a result, the compensation cost included in the pro forma net income amounts for each of the three years in the period ended December 31, 1998, may not be indicative of amounts to be expected in future periods. NOTE 11 -- BUSINESS COMBINATIONS AND SIGNIFICANT RESTRUCTURINGS THE DESTEC ACQUISITION. On June 27, 1997, Dynegy acquired Destec Energy, Inc. ("Destec"), an independent power producer, for $1.26 billion, or $21.65 per share of Destec common stock. Dynegy financed the transaction through cash on hand and advances on its credit facilities provided by its existing commercial banks. Concurrent with this acquisition, Dynegy sold Destec's international facilities and operations to The AES Corporation ("AES") for $439 million. Also during 1997, the Company sold certain non-strategic assets acquired in the purchase for aggregate proceeds of $296 million. Proceeds from the AES and non- strategic asset sales were used to retire indebtedness. The Destec acquisition was accounted for under the purchase method of accounting. Accordingly, the purchase price of approximately $718 million, inclusive of transaction costs and net of cash acquired, was allocated to the Destec assets acquired and liabilities assumed based on their estimated fair values as of June 30, 1997, the effective date of the acquisition for accounting purposes. The results of operations of the acquired Destec assets are consolidated with Dynegy's existing operations beginning July 1, 1997. The following table reflects certain unaudited pro forma information for the periods presented as if the Destec acquisition had occurred on January 1, 1996 (in thousands, except per share data): Years Ended December 31, ----------------------------- 1997 1996 ------------ ----------- Pro forma revenues $ 13,498,207 $ 7,529,928 Pro forma net income (loss) (101,175) 125,962 Pro forma earnings (loss) per share (0.67) 0.93 RESTRUCTURING OF NOVAGAS CLEARINGHOUSE, LTD. In June 1997, the Company and NOVA Corporation ("NOVA") completed the restructuring of the companies' Canadian natural gas operations formerly executed through Novagas Clearinghouse, Ltd., Novagas Clearinghouse Limited Partnership and Novagas Clearinghouse Pipelines Limited Partnership (collectively "NCL"), a joint venture between Dynegy and NOVA. Pursuant to the agreements, Dynegy Canada Inc. ("DCI"), a wholly owned indirect subsidiary of Dynegy, acquired NCL's natural gas marketing F-24 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS business, excluding the natural gas aggregation business of Pan-Alberta Gas Ltd. ("Pan-Alberta"), from NCL and sold its aggregate 49.9 percent interest in NCL to NOVA Gas International ("NGI"), a subsidiary of NOVA. NOVA assumed full ownership of NCL's gathering and processing business and the operations of Pan- Alberta. The restructuring included amendments to or termination of various agreements between NCL, Dynegy, NOVA and certain affiliates of both Dynegy and NOVA. Dynegy realized a pretax gain on the sale of its interest in NCL of $7.8 million, which is classified as other income in the accompanying consolidated statements of operations for the year ended December 31, 1997. The acquisition by Dynegy of NCL's marketing business was accounted for under the purchase method of accounting. Accordingly, the purchase price of $4.0 million, inclusive of transaction costs, was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of April 1, 1997, the effective date of the acquisition for accounting purposes. RESTRUCTURING OF ACCORD ENERGY LIMITED ("ACCORD"). In early 1997, British Gas completed a restructuring whereby Centrica plc ("Centrica") was demerged from British Gas and British Gas was renamed BG plc ("BG"). Centrica became the Company's joint venture partner in Accord. BG holds the approximate 26 percent stake in Dynegy's common stock formerly held by British Gas. On May 2, 1997, Centrica and the Company completed a restructuring of Accord by converting certain common stock interests in Accord to participating preferred stock interests as of an effective date of January 1, 1997. Centrica and the Company own 75 percent and 25 percent, respectively, of the outstanding participating preferred stock shares of Accord. The participating preferred stock has (a) the right to receive cumulative dividends on a priority basis to other corporate distributions by Accord, and (b) limited voting rights. In addition, Centrica has an option to purchase the Company's participating preferred stock interest at any time after July 1, 2000, at a formula based price, as defined in the agreement. As part of the reorganization, Centrica will operate Accord while Dynegy obtained the right to market natural gas, gas liquids and crude oil in the United Kingdom, which occurs through its wholly owned subsidiary Dynegy UK Limited ("Dynegy UK"). In addition, as part of the restructuring, Dynegy UK acquired Accord's existing crude oil marketing business effective July 1, 1997. No gain or loss was recognized as a result of this restructuring and Dynegy's investment in Accord continues to be accounted for under the equity method. THE CHEVRON COMBINATION. On August 31, 1996, Dynegy completed a strategic combination (the "Chevron Combination") with Chevron U.S.A. Inc. and certain Chevron affiliates ("Chevron") pursuant to which Chevron contributed substantially all of its midstream assets (the "Contribution"), including substantially all of the assets comprising Warren Petroleum Company and Chevron's Natural Gas Business Unit and an undivided interest in those assets that constitute the West Texas LPG Pipeline, into Midstream Combination Corp. ("Midstream"), a Delaware corporation formed for purposes of the transaction. Dynegy was merged with and into Midstream immediately following the Contribution and Midstream was renamed Dynegy Corporation. In exchange for the Contribution, Chevron received approximately 38.6 million shares of Dynegy common stock and approximately 7.8 million shares of Dynegy Series A Participating Preferred Stock and Dynegy assumed approximately $283 million of indebtedness. Immediately following closing of the Chevron Combination, Dynegy paid approximately $128 million to Chevron and funded such payment under its Credit Agreement. The Chevron Combination was accounted for as an acquisition of assets under the purchase method of accounting. The purchase price of approximately $740 million, inclusive of assumed indebtedness and transaction costs, was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of an effective date of September 1, 1996. Note 12 -- IMPAIRMENT, ABANDONMENT AND OTHER CHARGES During the fourth quarter of 1997, the Company recognized a $275 million charge principally related to impairment of certain long-lived assets, abandonment of certain operating assets and reserves for obsolescence, contingencies and other obligations. The charge primarily resulted from the completion of a plan of restructuring of the Company's natural gas liquids and crude oil businesses, which includes rationalization and consolidation of assets acquired in both the Trident and Chevron Combinations, and the pursuit of a joint venture partner in order to achieve critical mass in its crude oil marketing business. In addition, a company-wide reorganization of reporting responsibilities and improvements in business processes and computer information systems resulted in the identification during the fourth quarter of 1997 of other obsolete assets and a reduction of employees involved in non-strategic operations. F-25 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The charge, which was substantially non-cash in nature, consisted of the following (in thousands): Abandonment of long-lived operating assets $ 154,984 Impairment of operating assets and intangibles 79,550 Inventory obsolescence reserve and write-off 10,340 Write-off of other obsolete assets 12,011 Contingency and other obligation reserves 16,750 Severance charge 1,365 --------- $ 275,000 ========= The fair values of the assets impaired and abandoned were determined using a discounted cash flow methodology. During 1998, Management substantially completed its plan of rationalization, reorganization and abandonment of assets anticipated at the end of 1997. In addition, pursuant to the execution of the restructuring plan, a charge of $9.6 million related to severance charges was recognized in the first quarter of 1998. The severance charge was related to the termination of approximately 200 corporate and field employees. The charge recognized in the first quarter of 1998 approximated the actual severance expenditures. Also during the fourth quarter of 1997, the Company changed its method for accounting for certain business process re-engineering and information technology transformation costs pursuant to a consensus reached in November 1997 by the EITF. The EITF concluded that all re-engineering costs, including those incurred in connection with a software installation, should be expensed as incurred. The Company had previously capitalized certain re-engineering costs and was amortizing such costs over the estimated useful lives of the projects. The cumulative effect of this change in accounting of $14.8 million represented the one-time charge for the aggregate unamortized re-engineering costs previously capitalized. NOTE 13 -- EMPLOYEE COMPENSATION, SAVINGS AND PENSION PLANS CORPORATE INCENTIVE PLAN. Dynegy maintains a discretionary incentive plan to provide employees competitive and meaningful rewards for reaching corporate and individual objectives. Specific rewards are at the discretion of the Compensation Committee of the Board of Directors ("Compensation Committee"). PROFIT SHARING/SAVINGS PLAN. The Company established the Dynegy Profit Sharing/401(k) Savings Plan ("Plan"), which meets the requirements of Section 401(k) of the Internal Revenue Code, and is a defined contribution plan subject to the provisions of the Employee Retirement Income Security Act of 1974. The Plan and related trust fund are established and maintained for the exclusive benefit of participating employees in the United States and certain expatriates. Similar plans are available to other employees resident in foreign countries subject to the laws of each country. All eligible employees may participate in the plans and employee contributions are generally matched dollar-for-dollar for the first 5 percent of compensation, subject to Company performance. Employees vest in the Company's contributions over various periods. The Company also makes profit sharing contributions to employees' accounts regardless of their individual participation in the Profit Sharing/Savings Plans. Matching contributions to the Plan and certain discretionary profit sharing contributions are made in Company common stock, other contributions are made in cash. During the years ended December 31, 1998, 1997 and 1996, Dynegy recognized aggregate costs related to these employee compensation plans of $12.9 million, $9.7 million and $5.3 million, respectively. PENSION PLAN. Through a business acquisition, the Company acquired a noncontributory defined benefit pension plan and such plan remains in existence at December 31, 1998. The Trident NGL, Inc. Retirement Plan ("Retirement Plan") is a qualified plan under the Internal Revenue Service regulations. The Retirement Plan is closed F-26 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS to new participants. Benefits are based on years of service and final average pay, as defined in the Retirement Plan document. Contributions to the Retirement Plan in 1998 and 1997 represent the minimum amount required by federal law and regulation. The Retirement Plan's funded status and amount recognized in Dynegy's balance sheet at December 31, 1998 and 1997, were:
DECEMBER 31, ----------------------- 1998 1997 ------- ------ ($ IN THOUSANDS) Projected benefit obligation, beginning of the year $ 9,378 $8,909 Service cost 665 711 Interest cost 722 686 Actuarial (gain) loss 1,137 (807) Benefits paid (147) (121) ------- ------ Projected benefit obligation, end of the year $11,755 $9,378 ======= ====== Fair value of plan assets, beginning of the year $ 8,480 $5,798 Actual return on plan assets 615 1,746 Employer contributions 397 1,057 Benefits paid (147) (121) ------- ------ Fair value of plan assets, end of the year $ 9,345 $8,480 ======= ====== Funded status $ 2,410 $ 898 Unrecognized net gain from past experience different from that assumed 3,668 5,025 ------- ------ Pension liability $ 6,078 $5,923 ======= ======
Current year pension expense is based on measurements of the projected benefit obligation and the market related value of the Retirement Plan assets as of the end of the year. The projected benefit obligation at December 31, 1998, was based on a discount rate of 7.00 percent and an average long-term rate of compensation growth of 3.5 percent. The expected long-term rate of return on the Retirement Plan assets was estimated at 8.0 percent. The components of net pension expense for the Retirement Plan were:
YEARS ENDED DECEMBER 31, ----------------------- 1998 1997 ------- ------ ($ IN THOUSANDS) Service cost benefits earned during period $ 665 $ 712 Interest cost on projected benefit obligation 722 686 Expected return on plan assets (618) (502) Amortization of unrecognized gain (218) (115) ----- ----- Net periodic pension cost $ 551 $ 781 ===== =====
Note 14 -- RELATED PARTY TRANSACTIONS The Company is a leading North American marketer of natural gas, electricity, coal, natural gas liquids, crude oil, liquid petroleum gas and related services. Dynegy is also engaged in natural gas gathering, processing, fractionation and transportation and electric power generating activities. The Company has operations in Canada and the United Kingdom and transports liquid petroleum gas through its international deepwater LPG business. The Company routinely transacts business directly or indirectly with three of its significant shareholders, Chevron, NOVA and BG, each of which owns approximately 26 percent of the outstanding shares of the Company's common stock. Chevron holds all of the outstanding shares of the Series A Preferred. Transactions between the Company and Chevron result principally from the ancillary agreements entered into as part of the Chevron Combination. Transactions between Dynegy, NOVA and BG result from purchases and sales of natural gas, natural gas liquids and crude oil between subsidiaries of Dynegy and these companies. It is management's opinion that these transactions are executed at prevailing market rates. During the years ended F-27 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996, the Company recognized in its statement of operations aggregate sales to, and aggregate costs from, these significant shareholders of $888 million and $1.7 billion, $788.9 million and $2.4 billion; and $286.7 million and $1.1 billion, respectively. Note 15 -- SEGMENT INFORMATION The Company has adopted Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" and has restated its segment disclosures for all reporting periods. Dynegy's operations are divided into two reportable segments: Wholesale Gas and Power and Liquids. The Wholesale Gas and Power segment is actively engaged in value creation through marketing and trading of natural gas, power and coal and the generation of electricity principally under the name Dynegy Marketing and Trade. The Liquids segment consists of the North American mid-stream liquids operations, as well as the international liquefied petroleum gas transportation and natural gas liquids marketing operations located in Houston and London, and certain other businesses. The North American mid-stream liquids operations are actively engaged in the gathering and processing of natural gas and the transportation, fractionation and storage of NGLs. This segment operates principally under the name Dynegy Mid-Stream Services. Generally, Dynegy accounts for intercompany transactions at prevailing market rates. Operating segment information for 1998, 1997 and 1996 is presented below. DYNEGY'S SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1998
WHOLESALE GAS AND POWER LIQUIDS ELIMINATION TOTAL ----------- ---------- --------- ----------- ($ IN THOUSANDS) Unaffiliated revenues: Domestic $ 9,149,299 $3,307,320 $ --- $12,456,619 Canadian 969,853 209,830 --- 1,179,683 United Kingdom 621,695 --- --- 621,695 ----------- ---------- --------- ----------- 10,740,847 3,517,150 --- 14,257,997 ----------- ---------- --------- ----------- Intersegment revenues Domestic 157,492 250,280 (407,772) --- Canadian 61,223 --- (61,223) --- United Kingdom --- --- --- --- ----------- ---------- --------- ----------- 218,715 250,280 (468,995) --- ----------- ---------- --------- ----------- Total revenues 10,959,562 3,767,430 (468,995) 14,257,997 ----------- ---------- --------- ----------- Operating margin 236,238 192,449 --- 428,687 Depreciation and amortization (29,026) (84,176) --- (113,202) Interest expense (24,944) (50,048) --- (74,992) Interest and other income 6,763 40,058 --- 46,821 Equity earnings of unconsolidated affiliates 75,242 15,796 --- 91,038 Income tax (provision) benefit (52,262) 1,924 --- (50,338) Net income from operations 90,750 17,603 --- 108,353 Cumulative effect of change in accounting principle --- --- --- --- Net income 90,750 17,603 --- 108,353 Identifiable assets: Domestic $ 2,838,367 $2,036,795 $ --- $ 4,875,162 Canadian 257,070 6,947 --- 264,017 United Kingdom 125,058 --- --- 125,058 Investment in unconsolidated affiliates 343,819 175,863 --- 519,682 Capital expenditures 359,516 118,948 --- 478,464
F-28 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DYNEGY'S SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1997
WHOLESALE GAS AND POWER LIQUIDS ELIMINATION TOTAL ----------- ---------- --------- ----------- ($ IN THOUSANDS) Unaffiliated revenues: Domestic $ 8,070,692 $ 4,205,759 $ --- $12,276,451 Canadian 632,411 264,028 --- 896,439 United Kingdom 205,490 --- --- 205,490 ----------- ----------- --------- ----------- 8,908,593 4,469,787 --- 13,378,380 ----------- ----------- --------- ----------- Intersegment revenues Domestic 83,944 437,567 (521,511) --- Canadian 30,580 --- (30,580) --- United Kingdom 1,314 --- (1,314) --- ----------- ----------- --------- ----------- 115,838 437,567 (553,405) --- ----------- ----------- --------- ----------- Total revenues 9,024,431 4,907,354 (553,405) 13,378,380 ----------- ----------- --------- ----------- Operating margin 126,805 258,489 --- 385,294 Impairment, abandonment and other charges --- 275,000 --- 275,000 Depreciation and amortization (16,425) (87,966) --- (104,391) Interest expense (12,214) (51,241) --- (63,455) Interest and other income 13,209 14,904 --- 28,113 Equity earnings of unconsolidated affiliates 36,241 22,718 --- 58,959 Income tax (provision) benefit (8,710) 70,920 --- 62,210 Net income (loss) from operations 24,321 (112,006) --- (87,685) Cumulative effect of change in accounting principle (7,289) (7,511) --- (14,800) Net income (loss) 17,033 (119,518) --- (102,485) Identifiable assets: Domestic $ 1,882,965 $ 2,299,312 $ --- $ 4,182,277 Canadian 239,090 40,900 --- 279,990 United Kingdom 54,635 --- --- 54,635 Investment in unconsolidated affiliates 310,445 160,032 --- 470,477 Capital expenditures 815,271 189,388 --- 1,004,659
F-29 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DYNEGY'S SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1996
WHOLESALE GAS AND POWER LIQUIDS ELIMINATION TOTAL ----------- ---------- --------- ----------- ($ IN THOUSANDS) Unaffiliated revenues: Domestic $ 4,422,849 $ 2,800,813 $ --- $ 7,223,662 Canadian --- 36,540 --- 36,540 United Kingdom --- --- --- --- ----------- ----------- --------- ----------- 4,422,849 2,837,353 --- 7,260,202 ----------- ----------- --------- ----------- Intersegment revenues Domestic 80,943 242,297 (323,240) --- Canadian --- --- --- --- United Kingdom --- --- --- --- ----------- ----------- --------- ----------- 80,943 242,297 (323,240) --- ----------- ----------- --------- ----------- Total revenues 4,503,792 3,079,650 (323,240) 7,260,202 ----------- ----------- --------- ----------- Operating margin 103,624 265,876 --- 369,500 Depreciation and amortization (3,897) (67,779) --- (71,676) Interest expense (2,179) (44,023) --- (46,202) Interest and other income 4,825 660 --- 5,485 Equity earnings of unconsolidated affiliates 20,696 7,379 --- 28,075 Income tax provision (19,792) (36,531) --- (56,323) Net income from operations 50,907 62,416 --- 113,323 Cumulative effect of change in accounting principle --- --- --- --- Net income 50,907 62,416 --- 113,323 Identifiable assets: Domestic $ 1,467,990 $ 2,635,318 $ --- $ 4,103,308 Canadian 34,917 30,507 --- 65,424 United Kingdom 18,079 --- --- 18,079 Investment in unconsolidated affiliates 52,500 129,188 --- 181,688 Capital expenditures 6,324 821,848 --- 828,172
F-30 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the Company's unaudited quarterly financial information for the years ended December 31, 1998 and 1997. Quarter Ended ---------------------------------------------- March June September December 1998 1998 1998 1998 ---------------------------------------------- ($ in thousands, except per share data) Revenues $3,315,569 $3,278,214 $4,586,515 $3,077,699 Operating margin 96,989 107,915 105,985 117,798 Income before income taxes 16,411 35,043 63,739 43,498 Net income 12,339 23,441 43,645 28,928 Net income per share (2) 0.07 0.14 0.27 0.18 Quarter Ended ---------------------------------------------- March June September December 1998 1998 1998 1998 ---------------------------------------------- ($ in thousands, except per share data) Revenues $3,272,080 $2,684,339 $3,657,456 $3,764,505 Operating margin 67,347 97,767 110,848 109,332 Income (loss) before income taxes 4,429 43,575 37,326 (235,225) Net income (loss) (1) 4,614 32,128 25,028 (164,255) Net income (loss) per share (2) 0.03 0.19 0.15 (1.09) 1. Fourth quarter results include the impairment, abandonment and other charges of $275 million, on a pre-tax basis, and the $14.8 million effect of the change in accounting principle. 2. Net income (loss) per share amounts have been restated to conform to the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." F-31 SCHEDULE I DYNEGY INC. CONDENSED BALANCE SHEETS OF REGISTRANT (IN THOUSANDS, EXCEPT SHARE DATA)
December 31, December 31, 1998 1997 ---------- ---------- ASSETS CURRENT ASSETS Cash $ 209,439 $ 375 Accounts receivable 500 32 Intercompany accounts receivable 446,959 177,479 Prepayments and other assets 6,773 4,992 ---------- ---------- 663,671 182,878 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT 3,297 9,590 Less: accumulated depreciation (2,587) (3,755) ---------- ---------- 710 5,835 ---------- ---------- OTHER ASSETS Investments in affiliates 1,514,635 1,483,092 Intercompany note receivable 160,000 160,000 Deferred taxes and other assets 205,536 77,366 ---------- ---------- $2,544,552 $1,909,171 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Intercompany accounts payable $ 155,131 $ 8,289 Accrued liabilities 146,100 16,764 ---------- ---------- 301,231 25,053 LONG-TERM DEBT 913,000 664,500 COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST 200,000 200,000 OTHER LIABILITIES 2,258 493 ---------- ---------- 1,416,489 890,046 ---------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, 50,000,000 shares authorized: 8,000,000 shares designated as Series A Participating Preferred Stock, 7,815,363 shares issued and outstanding at December 31, 1998 and 1997 75,418 75,418 Common stock, $0.01 par value, 400,000,000 shares authorized: 153,298,220 shares issued at December 31, 1998, and 151,796,622 shares issued at December 31, 1997 1,533 1,518 Additional paid-in capital 935,183 919,720 Retained earnings 133,340 32,975 Less: treasury stock, at cost: 1,200,700 shares at December 31, 1998 654,900 shares at December 31, 1997 (17,411) (10,506) ---------- ---------- 1,128,063 1,019,125 ---------- ---------- $2,544,552 $1,909,171 ========== ==========
See Note to Registrant's Financial Statements. F-32 SCHEDULE I DYNEGY INC. STATEMENTS OF OPERATIONS OF THE REGISTRANT FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998 (IN THOUSANDS)
1998 1997 1996 -------- --------- -------- Depreciation and amortization $ (241) $ (1,292) $ (496) Impairment, abandonment and other charges (959) (3,886) --- General and administrative expenses --- --- --- -------- --------- -------- Operating loss (1,200) (5,178) (496) Equity in earnings of affiliates 215,928 (115,108) 182,159 Intercompany interest and other income 13,667 16,928 17,968 Interest expense (68,403) (45,790) (28,071) Other expenses (1,301) (747) (1,915) -------- --------- -------- Income (loss) before income taxes 158,691 (149,895) 169,645 Income tax provision (benefit) 50,338 (62,210) 56,323 -------- --------- -------- Net income (loss) from continuing operations before cumulative effect of change in accounting 108,353 (87,685) 113,322 Cumulative effect of change in accounting principle (net of income tax benefit of $7,913) --- (14,800) --- -------- --------- -------- NET INCOME (LOSS) $108,353 $(102,485) $113,322 ======== ========= ========
See Note to Registrant's Financial Statements. F-33 SCHEDULE I DYNEGY INC. STATEMENTS OF CASH FLOWS OF THE REGISTRANT FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998 (IN THOUSANDS)
1998 1997 1996 --------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 108,353 $ (102,485) $ 113,322 Items not affecting cash flows from operating activities: Depreciation and amortization 1,864 9,631 1,996 Equity in earnings of affiliates, net of cash distributions 215,928 115,108 (182,159) Deferred taxes 50,338 (86,424) 45,896 Other --- 12,344 7,466 Change in assets and liabilities resulting from operating activities: Accounts receivable (468) 76 (108) Intercompany transactions (192,270) 636,063 (298,592) Prepayments and other assets (2,212) (2,749) 2,260 Accrued liabilities 3,693 1,529 8,487 Other, net (29,778) 2,493 (1,193) --------- ----------- ----------- Net cash used in operating activities 155,448 585,586 (302,625) --------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures --- (5,121) (2,055) Acquisitions (2,644) (785,349) --- Other --- --- --- --------- ----------- ----------- Net cash used in investing activities (2,644) (790,470) (2,055) --------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings 212,259 2,218,500 1,542,000 Repayments of long-term borrowings (493,277) (2,198,000) (1,231,000) Net proceeds from commercial paper and money market lines of credit 350,758 --- --- Intercompany advances --- --- --- Proceeds from sale of capital stock, options and warrants 3,863 203,190 858 Treasury stock acquisitions (6,905) (10,506) --- Capital contributions --- --- --- Dividends and other distributions (7,988) (7,925) (7,184) Other financing (2,450) --- --- --------- ----------- ----------- Net cash provided by financing activities 56,260 205,259 304,674 --------- ----------- ----------- Net (decrease) increase in cash and cash equivalents 209,064 375 (6) Cash and cash equivalents, beginning of period 375 --- 6 --------- ----------- ----------- Cash and cash equivalents, end of period $ 209,439 $ 375 $ --- ========= =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid (net of amount capitalized) $ 100,589 $ 60,323 $ 22,341 ========= =========== =========== Taxes paid (net of refunds) $ (8,000) $ 8,043 $ 1,444 ========= =========== =========== Cash dividends paid to parent by consolidated or unconsolidated subsidiaries $ --- $ --- $ --- ========= =========== ===========
See Note to Registrant's Financial Statements. F-34 SCHEDULE I DYNEGY INC. NOTE TO REGISTRANT'S FINANCIAL STATEMENTS NOTE 1 -- BASIS OF PRESENTATION Dynegy Inc. ("Dynegy" or the "Company") is a holding company that principally conducts all of its business through its subsidiaries. The Company is the result of a strategic business combination ("Trident Combination") between Natural Gas Clearinghouse and Trident NGL Holding, Inc. ("Holding"), under which Holding was renamed NGC Corporation. Pursuant to the terms of the Trident Combination, Holding was the legally surviving corporation and Clearinghouse was considered the acquiring company for accounting purposes resulting in a new historical cost basis for Holding beginning March 1, 1995, the effective date of the Trident Combination. During 1998, the Company changed its name to Dynegy Inc. in order to reflect its evolution from a natural gas marketing company to an energy services company capable of meeting the growing demands and diverse challenges of the dynamic energy market of the 21st Century. The accompanying condensed Registrant Financial Statements were prepared pursuant to rules promulgated by the Securities and Exchange Commission. In accordance with these rules, the accompanying statements reflect the financial position, results of operations and cash flows of Dynegy, the holding company of Dynegy Inc., at December 31, 1998 and 1997, and for the years then ended through December 31, 1996, respectively. These statements should be read in conjunction with the Consolidated Statements and notes thereto of Dynegy Inc. F-35 EX-10.3 2 AMENDED AND RESTATED 1991 STOCK OPTION PLAN EXHIBIT 10.3 DYNEGY INC. AMENDED AND RESTATED 1991 STOCK OPTION PLAN [AS AMENDED THROUGH AUGUST 20, 1998]/1/ I. PURPOSES Dynegy Inc., a Delaware corporation (the "Company"), desires to afford certain of its directors and key employees (herein, "Key Persons") and the Key Persons of any Related Entity (as defined below) who are responsible for the continued growth of the Company an opportunity to acquire a proprietary interest in the Company, and thus to create in such Key Persons an increased interest in and a greater concern for the welfare of the Company and its stockholders. From and after December 8, 1995, for all purposes under the Plan, the term "Related Entity" shall mean (i) Novagas Clearinghouse Ltd., (ii) Accord Energy Ltd., and (iii) any corporation, partnership, limited liability company or partnership, association, trust or other organization now existing or hereafter formed or acquired which, directly or indirectly, controls, is controlled by, or is under common control with, the Company: provided, however, that (1) for purposes of Articles V, VI and VIII of the Plan, and (2) with respect to Incentive Options (as defined below) granted prior to May 10, 1996, for purposes of Article XII of the Plan, the term "Related Entity" shall mean a subsidiary corporation or parent corporation of the Company now existing or hereafter formed or acquired. For purposes of the preceding sentence, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any entity or organization, shall mean the possession, directly or indirectly, of the power (A) to vote more than 50% of the securities having ordinary voting power for the election of directors of the controlled entity or organization, or (B) to direct or cause the direction of the management and policies of the controlled entity or organization, whether through the ownership of voting securities or by contract or otherwise. As used in the Plan, the terms "subsidiary corporation" and "parent corporation" shall mean, respectively, a corporation coming within the definition of such terms contained in Sections 424(f) and 424(e) of the Internal Revenue Code of 1986, as amended (the "Code "). The stock options ("Options") offered pursuant to this Amended and Restated 1991 Stock Option Plan (the "Plan") are a matter of separate inducement and are not in lieu of any salary or other compensation for services of any Key Person. The Company, by means of the Plan, seeks to retain the services of persons now holding key positions and to secure the services of persons capable of filling such positions. The Options granted under the Plan are intended to be either incentive stock options ("Incentive Options") within the meaning of Section 422 of the Code, or options that do not meet - --------------------- /1/ The Plan was amended and restated effective as of May 10, 1996. This version of the Plan reflects all amendments to the Plan through August 20, 1998, including, without limitation, the amendments implemented to reflect the corporate name change from "NGC Corporation" to "Dynegy Inc." the requirements for Incentive Options ("Non-Qualified Options"), but the Company makes no warranty as to the qualification of any Option as an Incentive Option. II. AMOUNT OF STOCK SUBJECT TO THE PLAN Subject to the adjustments provided in Article XIII hereof, the total number of shares of capital stock of the Company that may be purchased pursuant to the exercise of Options granted under the Plan shall not exceed, in the aggregate, 9,892,610 shares of authorized voting common stock, par value $0.01 per share, of the Company (the "Shares"); provided, however, that notwithstanding any provision in the Plan to the contrary, the Committee (as defined below) may not grant Options under the Plan that could result in more than 6,692,610 Shares (subject to adjustment in the same manner as provided in Article XIII hereof with respect to the maximum number of Shares subject to the Plan) being issued upon the exercise of such Options unless the proposed transaction with Chevron U.S.A. Inc. ("Chevron") to combine substantially all of Chevron's gas gathering, processing and marketing operations with the Company is consummated. As used herein, the authorized common stock of the Company shall be referred to as "Company Stock." Shares that may be acquired under the Plan may be authorized but unissued Shares, Shares of issued stock held in the Company's treasury, issued Shares reacquired by the Company, or a combination thereof, in each case as the Committee may determine from time to time at its sole option. If and to the extent that Options granted under the Plan expire or terminate without having been exercised, new Options may be granted with respect to the Shares covered by such expired or terminated Options, provided that the grant and the terms of such new Options shall in all respects comply with the provisions of the Plan; provided, however, that no Option shall be granted under the Plan after the Termination Date (as defined below). The Company may from time to time grant to certain Key Persons of the Company or a Related Entity Options under the terms hereinafter set forth; provided, however, that, except with respect to Options then outstanding, if not sooner terminated under the provisions of Article XX, the Plan shall terminate upon and no further Options shall be granted after May 9, 2006 (the "Termination Date"). Notwithstanding any provision in the Plan to the contrary, Incentive Options may be granted only to Key Persons who are employed by the Company or a Related Entity that is a subsidiary corporation or parent corporation of the Company on the date of grant of any such Option. III. ADMINISTRATION The Plan shall be administered by the Option Committee, or any successor thereto, of the Board of Directors of the Company (the "Board of Directors"), or by any other committee appointed by the Board of Directors to administer this Plan (the "Committee"). The number of individuals that shall constitute the Committee shall be no less than two individuals. A majority of the Committee shall constitute a quorum (or if the Committee consists of only two members, then both members shall constitute a quorum), and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the 2 Committee, shall be the acts of the Committee. The Committee shall be comprised exclusively of "outside directors" as such term is used pursuant to Section 162(m) of the Code and any rules and regulations promulgated thereunder. At any time that the Company shall have a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (i) each member of the Committee shall be required to also be a "disinterested person" to administer the Plan within the meaning of Rule 16b-3, as amended (herein so called), or other applicable rules under Section 16(b) of the Exchange Act, and the Committee shall administer the Plan so as to comply at all times with the Exchange Act and (ii) no member of the Committee shall be eligible for grants or awards hereunder. The members of the Committee shall serve at the pleasure of the Board of Directors, which shall have the power, at any time and from time to time, to remove members from or add members to the Committee. Removal from the Committee may be with or without cause. Any individual serving as a member of the Committee shall have the right to resign from membership in the Committee by written notice to the Board of Directors. The Board of Directors, and not the remaining members of the Committee, shall have the power and authority to fill vacancies on the Committee, however caused. The Board of Directors shall promptly fill any vacancy that causes the number of members of the Committee to be below two or any other number that Rule 16b-3 or Section 162(m) of the Code (or other applicable rules or regulations) may require from time to time. Subject to the express provisions of the Plan, the Committee shall have authority, in its discretion, to determine the Key Persons to whom Options shall be granted, the time when such Options shall be granted to Key Persons, the number of Shares which shall be subject to each Option, the purchase price of each Share which shall be subject to each Option, the period(s) during which such Options shall be exercisable (whether in whole or in part), and the other terms and provisions thereof. In determining the Key Persons to whom Options shall be granted and the number of Shares for which Options shall be granted to each Key Person, the Committee shall consider the length of service, the contributions to the Company, its parents and subsidiaries taken as a whole, and the responsibilities and duties of each Key Person. Subject to the express provisions of the Plan, the Committee also shall have authority to construe the Plan and Options granted thereunder, to amend, or in the case of material amendments to the Plan, to recommend to the Board of Directors and the stockholders of the Company the amendment of, the Plan, to amend Options granted thereunder, to prescribe amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective Options (which need not be identical) and to make all other determinations necessary or advisable for administering the Plan. The Committee also shall have the authority to require, in its discretion, as a condition of the granting of any such Option, that an employee recipient agree (i) not to sell or otherwise dispose of Shares acquired pursuant to the exercise of an Incentive Option for a period of two (2) years from the grant of such Incentive Option nor within one (1) year from the date of the acquisition of such Shares pursuant to the exercise of such Incentive Option and (ii) that in the event of termination of employment of such employee, other than as a result of dismissal without cause, such employee will not, for a period to be fixed at the time of the grant of the Option, enter into any other employment or participate directly or 3 indirectly in any other business or enterprise which is competitive with the business of the Company or any Related Entity, or enter into any employment in which such employee will be called upon to utilize special knowledge obtained through employment with the Compary or any Related Entity. The Committee shall also have the authority to require, as a condition to the granting of any Option, that the person receiving such Option agree not to sell or otherwise dispose of such Option, any Company Stock acquired pursuant to such Option or any other "derivative security" (as defined by Rule 16a-1(c) under the Exchange Act) for a period of six (6)) months following the later of (i) the date of the grant of such Option, or (ii) the date when the exercise price of such Option is fixed if such exercise price is not fixed at the date of grant of such Option. Subject to and consistent with the express provisions of the Code and Rule 16b-3 promulgated under the Exchange Act, the Committee shall have plenary authority, in lieu of requiring a cash payment from the Key Person upon the exercise of an Option, to: (a) provide the establishment of procedures for a Key Person (1) to have withheld from the total number of Shares to be acquired upon the exercise of an Option that number of Shares having a fair market value (as defined herein) which, together with such cash as shall be paid in respect of fractional Shares, shall equal the Option exercise price, (2) to exercise an Option by delivering that number of Shares of Company Stock already owned by such Key Person having a fair market value which shall equal the Option exercise price, (3) to exercise a portion of an Option by delivering that number of Shares or Share of Company Stock already owned by such Key Person having a fair market value which shall equal the partial Option exercise price and to deliver the Shares thus acquired by such Key Person in payment of Shares to be received pursuant to the exercise of additional portions of such Option, the effect of which shall be that such Key Person can in sequence utilize such newly acquired Shares in payment of the exercise price of the entire Option, together with such cash as shall be paid in respect of fractional Shares, if any, or (4) to utilize a combination of the methods stated in clauses (1) and (3) above, or of cash and one or both of such methods, in payment of the exercise price of all or a portion of such Option; provided, however, that in the case of an Incentive Option, no Shares shall be used to pay the exercise price unless such Shares were not acquired through the exercise of an Incentive Option or, if so acquired, have been held for more than two years since the grant of such Option and for more than one year since the exercise of such Option; and (b) if appropriate, to provide an arrangement through registered broker-dealers whereby temporary financing may be made available by the broker-dealer to a Key Person who wishes to deliver Shares of the Company in partial or full payment of the exercise price of such Key Person's Option, under the rules and regulations of the Board of Governors of the Federal Reserve, for the purpose of assisting the Key Person in the exercise of an Option, such authority to include the payment by the Company of the commissions of the broker-dealer. 4 The determination of the Committee on matters referred to in this Article III shall be conclusive. The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion received from any such counsel or consultant and any computation received from any such consultant or agent. Expenses incurred by the Committee in the engagement of such counsel, consultant or agent shall be paid by the Company. No member or former member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted hereunder. IV. ELIGIBILITY Grants of Incentive Options and Non-Qualified Options may be made under the Plan, subject to and in accordance with the terms of the Plan, to Key Employees. As used herein, the term "Key Employee" shall mean any employee of the Company or any Related Entity, including officers and directors of the Company or any Related Entity who are also employees of the Company or any Related Entity, who are regularly employed on a salaried basis and who are so employed on the date of such grant, whom the Committee identifies as having a direct and significant effect on the performance of the Company or any Related Entity. Notwithstanding the preceding provisions of this Article IV, Incentive Options may be granted only to Key Employees who are employed by the Company or a Related Entity that is a subsidiary corporation or parent corporation of the Company on the date of grant of any such Option. Grants of Non-Qualified Options shall be made, subject to and in accordance with the terms hereof, to individuals not regularly employed by the Company who serve as directors of the Company ("Outside Director Participants"). The adoption of this Plan shall not be deemed to give any person a right to be granted any Options. Subject to the adjustment provisions contained in Article XIII, the aggregate number of Shares with respect to which Options granted to any Key Employee (which for purposes of this sentence shall include the Chairman of the Board, whether or not such person would otherwise be considered a Key Employee) are exercisable shall not exceed 1,063,083. V. LIMITATION ON EXERCISE OF INCENTIVE OPTIONS Except as otherwise provided under the Code, to the extent that the aggregate fair market value of stock with respect to which Incentive Options are exercisable for the first time by an employee during any calendar year (under all stock option plans of the Company and any Related Entity) exceeds $100,000, such Options shall be treated as Non-Qualified Options. For purposes of this limitation (i) the fair market value of stock is determined as of the time the Option is granted, and (ii) the limitation will be applied by taking into account Options in the order in which they were granted. 5 VI. OPTION PRICE AND PAYMENT The price ("Exercise Price") for each Share purchasable under any Option granted hereunder shall be such amount as the Committee shall, in its best judgment made in good faith, determine on the basis of facts and circumstances and the requirements, if any, of Section 162(m) of the Code and any rules or regulations promulgated thereunder to be not less than 100% of the fair market value per Share at the date such Option is granted; provided, however, that in the case of an Incentive Option granted to a person who, at the time such Incentive Option is granted, owns shares of the Company or any Related Entity which possesses ten percent (10%) of the total combined voting power of all classes of shares of the Company or of any Related Entity, the Exercise Price for each Share purchasable thereunder shall be such amount as the Committee, in its best judgment, shall determine to be not less than one hundred ten percent (110%), of the fair market value per Share at the date the Incentive Option is granted. In determining stock ownership of a Key Employee for any purposes under the Plan, the rules of Section 424(d) of the Code shall be applied, and the Committee may rely on representations of fact made to it by the Key Employee and believed by it to be true. If the Shares are listed on a national securities exchange in the United States on the date any Option is granted, the fair market value per share shall be deemed to be the average of the high and low quotations at which such Shares are sold on such national securities exchange on the date such Option is granted. If the Shares are listed on a national securities exchange in the United States on such date but the Shares are not traded on such date, or such national securities exchange is not open for business on such date, the fair market value per Share shall be determined as of the closest preceding date on which such exchange shall have been open for business and the Shares were traded. If the Shares are listed on more than one national securities exchange in the United States on the date any such Option is granted, the Committee shall determine which national securities exchange shall be used for the purpose of determining the fair market value per Share. If the Shares are not listed on a national securities exchange on such date, the last reported bid price in the over-the-counter market shall be the fair market value per share, or if the Shares are not traded on the over-the-counter market on such date, the fair market value per share shall be determined by the Committee in good faith. Notwithstanding the prior provisions of this paragraph, to the extent that Section 162(m) of the Code or any rule or regulation promulgated thereunder provides a different or inconsistent definition of "fair market value," such definition shall be applied in determining the fair market value per share of Options issued hereunder. For purposes of establishing the fair market value of Shares or underlying Options, the fair market value shall be determined without regard to any restriction on transfer thereof. For purposes of this Plan. the determination by the Committee of the fair market value of a Share shall be conclusive. Upon the exercise of an Option granted hereunder, the Company shall cause the purchased Shares to be issued only when it shall have received the full purchase price for the Shares in cash or by certified check, except as otherwise provided in Article III hereof. 6 VII. USE OF PROCEEDS The cash proceeds of the sale of Shares subject to the Options granted hereunder are to be added to the general funds of the Company and used for its general corporate purposes as the Board of Directors shall determine. VIII. TERMS OF OPTIONS AND LIMITATIONS ON THE RIGHT OF EXERCISE Subject to Article V, any Incentive Option granted hereunder shall be exercisable during a period of not more than ten (10) years from the date of grant of such Option at such times and in such amounts as the Committee shall determine at such date of grant; provided, however, that in the case of an Incentive Option granted to a person who, at the time the Incentive Option is granted, owns shares in the Company or in any Related Entity which possesses more than ten percent (10%) of the total combined voting power of all classes of shares of the Company or of any Related Entity, such Option shall expire not more than five (5) years from the date of grant. Any Non-Qualified Option granted hereunder shall be exercisable at such times, in such amounts and during such period or periods as the Committee shall determine at the date of the grant of such Option. The Committee shall have the right to accelerate, in whole or in part, from time to time, conditionally or unconditionally, rights to exercise any Option granted hereunder. To the extent that an Option is not exercised within the period of exercisability specified therein, it shall expire as to the then unexercised part. If any Option granted hereunder shall terminate prior to the Termination Date, the Committee shall have the right to use the Shares as to which such Option shall not have been exercised to grant one or more additional Options to any eligible Key Person. but any such grant of an additional Option shall be made prior to the close of business on the Termination Date. In no event shall an Option granted hereunder be exercised for a fraction of a share. IX. EXERCISE OF OPTIONS Options granted under the Plan shall be exercised by the Optionee as to all or part of the Shares covered thereby by the giving of written notice of the exercise thereof to the Corporate Secretary of the Company at the principal business office of the Company, specifying the number of Shares to be purchased and specifying a business day not more than fifteen (15) days from the date such notice is given, for the payment of the purchase price against delivery of the Shares being purchased. Subject to the terms of Articles III, XV, XVII and XVIII, the Company shall cause certificates for the Shares so purchased to be delivered to the Optionee at the principal business office of the Company, against payment of the full purchase price in cash or by certified check except as otherwise provided in Article III. 7 X. STOCK APPRECIATION RIGHTS [DELETED] XI. NON-TRANSFERABILITY OF OPTIONS An Option granted hereunder shall not be transferable, whether by operation of law or otherwise, other than by will or the laws of descent and distribution, and any Option granted hereunder shall be exercisable, during the lifetime of the holder, only by such holder. XII. TERMINATION OF EMPLOYMENT AND SERVICE Upon termination of a Key Person's service with the Company and all Related Entities, any Option previously granted hereunder, unless otherwise specified by the Committee in the Option, shall, to the extent not theretofore exercised, terminate and become null and void, provided that: (a) if the recipient shall die while in the service of the Company or a Related Entity or during either the three (3) month or one (1) year period, whichever is applicable, specified in clause (b) below and at a time when such recipient was entitled to exercise an Option as herein provided, the legal representative of such recipient, or such person who acquired such Option by bequest or inheritance or by reason of the death of the recipient, may, not later than one (1) year from the date of death (or such longer period as may be specified by the Committee with respect to a Non-Qualified Option), exercise such Option to the extent not theretofore exercised, in respect of any or all of such number of Shares as specified by the Committee in such Option; and (b) if the service of any recipient to whom such Option shall have been granted shall terminate by reason of the recipient's retirement (at such age or upon such conditions as shall be specified by the Committee), disability (as described in Section 22(e)(3) of the Code) or dismissal by the Company or a Related Entity other than for cause (as defined below), and while such recipient is entitled to exercise such Option as herein provided, such recipient shall have the right to exercise such Option so granted, to the extent not theretofore exercised, in respect of any or all of such number of Shares as specified by the Committee in such Option, at any time up to and including (i) three (3) months after the date of such termination in the case of termination by reason of retirement or dismissal other than for cause (or such longer period as may be specified by the Committee with respect to a Non-Qualified Option), and (ii) one (1) year after the date of termination in the case of termination by reason of disability (or such longer period as may be specified by the Committee with respect to a Non-Qualified Option). If a recipient voluntarily terminates his or her employment or service as an Outside Director Participant, or is discharged for cause, any Option granted hereunder shall, unless otherwise specified by the Committee in the Option, forthwith terminate with respect to any unexercised portion thereof. 8 Each Incentive Option by its terms shall require the recipient to remain in the continuous employ of the Company or any subsidiary corporation or parent corporation of the Company from the date of grant of the Incentive Option until no more than three (3) months prior to the date of exercise of the Incentive Option (except as otherwise provided herein in the event of' death or disability). Notwithstanding the preceding paragraphs of this Article XII, if the service of any recipient with the Company and all Related Entities is terminated, whether voluntarily or involuntarily, within a one-year period following a change in control of the Company (as defined Article XIII), other than a termination of such service for cause, such recipient shall have the right to exercise all or any portion of the Option, whether vested or unvested, at any time up and to and including three (3) months after the date of such termination (or such longer period as may be specified by the Committee with respect to a Non-Qualified Option), at which time such Option shall cease to be exercisable. Notwithstanding the immediately preceding paragraphs of this Article XII, no Option may be exercised after the expiration of the period of exercisability provided for in such Option. If an Option granted hereunder shall be exercised by the legal representative of a deceased recipient or former recipient, or by a person who acquired an Option granted hereunder by bequest or inheritance or by reason of the death of any recipient or former recipient, written notice of such exercise shall be accompanied by a certified copy of letters testamentary or equivalent proof of the right of such legal representative or other person to exercise such Option. For the purposes of the Plan, the term "for cause" shall mean (i) with respect to an employee who is a party to a written agreement with, or alternatively, participates in a compensation or benefit plan of the Company or a Related Entity, which agreement or plan contains a definition of "for cause" or "cause" (or words of like import) for purposes of termination of employment thereunder by the Company or such Related Entity, "for cause" or "cause" as defined in the most recent of such agreements or plans, or (ii) in all other cases, as determined by the Committee in its sole discretion, (a) the willful commission by an employee of a criminal or other act that causes or will probably cause substantial economic damage to the Company or a Related Entity or substantial injury to the business reputation of the Company or a Related Entity; (b) the continuing willful failure of an employee to perform the duties of such employee to the Company or a Related Entity (other than such failure resulting from the employee's incapacity due to physical or mental illness) after written notice thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to the employee by the Committee; (c) the order of a court of competent jurisdiction requiring the termination of the employee's employment; or (d) in the case of an Outside Director Participant, the failure of such Outside Director Participant to act in good faith or the taking of any action that constitutes a material breach of such person's fiduciary duty to the Company. For purposes of the Plan, no act or failure to act, on the employee's part shall be considered "willful" unless done or omitted to be done by the employee not in good faith and 9 without reasonable belief that the employee's action or omission was in the best interest of the Company or a Related Entity. For the purposes of the Plan, an employment relationship shall be deemed to exist between an individual and the Company or a Related Entity if, at the time of the determination, the individual was an "employee" of the Company or such Related Entity. If an individual is on military, sick leave or other bona fide leave of absence, such individual shall be considered an "employee" for purposes of the exercise of an Option and shall be entitled to exercise such Option during such leave if the period of such leave does not exceed 90 days, or, if longer, so long as the individual's right to reemployment with the Company (or a Related Entity) is guaranteed either by statute or by contract. If the period of leave exceeds ninety (90) days, the employment relationship shall be deemed to have terminated on the ninety-first (91st) day of such leave, unless the individuals right to re-employment is guaranteed by statute or contract. A termination of employment shall not be deemed to occur by reason of (i) the transfer of an employee from employment by the Company to employment by a Related Entity, or (ii) the transfer of an employee from employment by a Related Entity to employment by the Company or by another Related Entity. XIII. ADJUSTMENT OF SHARES; EFFECT OF CERTAIN TRANSACTION In the event of any change in the outstanding Shares through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, or other like change in capital structure of the Company, an adjustment shall be made to each outstanding Option such that each such Option shall thereafter be exercisable for such securities, cash and/or other property as would have been received in respect of the Shares subject to such Option had such Option been exercised in full immediately prior to such change, and such an adjustment shall be made successively each time any such change shall occur. The term "Shares" shall after any such change refer to the securities, cash and/or property then receivable upon exercise of an Option. In addition, in the event of any such change, the Committee shall make any further adjustment as may be appropriate to the maximum number of Shares subject to the Plan, the maximum number of Shares of which Options may be granted to any one recipient, and the number of Shares and price per Share subject to outstanding Options as shall be equitable to prevent dilution or enlargement of rights under such Options, and the determination of the Committee as to these matters shall be conclusive. Notwithstanding the foregoing, (i) each such adjustment with respect to an Incentive Option shall comply with the rules of Section 424(a) of the Code, and (ii) in no event shall any adjustment be made which would render any Incentive Option granted hereunder other than an incentive stock option for purposes of Section 422 of the Code. In the event of a change in control of the Company, all then outstanding vested Options shall immediately become exercisable. For purposes of the Plan, a "change in control" of the Company occurs if: (a) any "person" (defined as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act, as amended), other than a stockholder of the Company as of the date of the adoption of the Plan by the Board of Directors or any affiliate of any such stockholder, is or 10 becomes the beneficial owner, directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's outstanding securities then entitled to vote for the election of directors; (b) the Board of Directors shall approve the sale of all or substantially all of the assets of the Company; or (c) the Board of Directors shall approve any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of any event described in clause (a) above. The Committee in its discretion may determine that, upon the occurrence of a transaction described in the preceding paragraph, each Option outstanding hereunder shall terminate within a specified number of days after notice to the holder, and such holder shall receive, with respect to each Share subject to such Option, cash in an amount equal to the excess of the fair market value of such Share immediately prior to the occurrence of such transaction over the exercise price per Share of such Option immediately prior to the occurrence of such transaction. The provisions contained in the preceding sentence shall be inapplicable to an Option granted within six (6) months before the occurrence of a transaction described above if the holder of such Option is subject to the reporting requirements of Section 16(a) of the Exchange Act. XIV. RIGHT TO TERMINATE EMPLOYMENT The Plan shall not impose any obligation on the Company or on any Related Entity thereof to continue the employment of any holder of an Option; and it shall not impose any obligation on the part of any holder of an Option to remain in the employ of the Company or of any Related Entity. XV. PURCHASE FOR INVESTMENT Except as hereafter provided, the holder of an Option granted hereunder shall, upon any exercise thereof, execute and deliver to the Company a written statement, in form satisfactory to the Company, in which such holder represents and warrants that such holder is purchasing or acquiring the Shares acquired thereunder for such holder's own account, for investment only and not with a view to the resale or distribution thereof, and agrees that any subsequent offer for sale or sale or distribution of any of such Shares shall be made pursuant to either (a) a Registration Statement on an appropriate form under the Securities Act of 1933, as amended (the "Securities Act"), which Registration Statement has become effective and is current with regard to the Shares being offered or sold, or (b) a specific exemption from the registration requirements of the Securities Act and any applicable state securities law or regulation, but in claiming such exemption the holder shall, prior to any offer for sale or sale of such Shares, obtain a prior favorable written opinion, in form and substance satisfactory to the Company, from counsel for or approved by the Company, as to the applicability of such exemption thereto. Notwithstanding the prior sentence, no exercise of an Option shall be deemed to be effective if the Company, in its sole discretion, determines that a violation of any federal or state securities law or rule or regulation promulgated thereunder, would result therefrom. The foregoing restrictions shall not apply to (i) issuances by the Company so long as the Shares being issued are registered under the Securities Act and a prospectus in respect thereof is current, or (ii) reofferings of Shares by affiliates of the Company (as defined in Rule 405 or any successor rule or regulation promulgated 11 under the Securities Act) if the Shares being reoffered are registered under the Securities Act and a prospectus in respect thereof is current. XVI. ISSUANCE OF CERTIFICATES; LEGENDS; PAYMENT OF EXPENSES Subject to the provisions of Articles III, XV and XVIII hereof, upon any exercise of an Option which may be granted hereunder and payment of the purchase price in full in cash or by certified check, a certificate or certificates for the Shares as to which the Option has been exercised shall be issued by the Company in the name of the person exercising the Option and shall be delivered to or upon the order of such person. The Company may endorse such legend or legends upon the certificates for Shares issued upon exercise of an Option granted hereunder and may issue such "stop transfer" instructions to its transfer agent in respect of such Shares as, in its discretion, it determines to be necessary or appropriate to (i) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act or any state "blue sky" law or regulation, (ii) implement the provisions of the Plan and any agreement between the Company and the optionee or grantee with respect to such Shares, or (iii) permit the Company to determine the occurrence of a disqualifying disposition as described in Section 421(b) of the Code, of Shares transferred upon exercise of an Incentive Option granted under the Plan. The Company shall pay all issue taxes with respect to the issuance of Shares to the person exercising the Option, as well as all fees and expenses necessarily incurred by the Company in connection with such issuance. All Shares issued as provided herein shall be fully paid and non-assessable to the extent permitted by law. XVII. WITHHOLDING TAXES The Company may require a Key Person exercising a Non-Qualified Option granted hereunder, or disposing of Shares acquired pursuant to the exercise of an Incentive Option in a disqualifying disposition (within the meaning of Section 421(b) of the Code), to reimburse the Company or Related Entity, as appropriate, for any taxes required by any governmental authority to be withheld or otherwise deducted and paid by such corporation in respect of the issuance or disposition of Shares. In lieu thereof, the Company or Related Entity, as appropriate, shall have the right to withhold the amount of such taxes from any other sums due or to become due from such Corporation to the Key Person upon such terms and conditions as the Committee shall prescribe. At any time that the Company or a Related Entity becomes subject to a withholding obligation under applicable law with respect to the exercise of a Non-Qualified Option except as set forth below, a Key Person may elect to satisfy, in whole or in part, the Key Person's related personal tax liabilities (an "Election") by (i) the payment of cash, (ii) electing to have such amount withheld from sums otherwise due to the Key Person, (iii) subject to the other requirements of this Section XVII, directing the Company or the subsidiary to withhold from Shares issuable in the related exercise either a specified number of Shares or Shares having a 12 specified value in each case with a value not in excess of such tax liabilities, (iv) subject to the requirements of Section 16(b) of the Exchange Act and the rules promulgated thereunder, tendering Shares previously issued pursuant to an exercise or other shares of the Company's common stock owned by the Key Person, or (v) combining any or all of the foregoing options; provided, that the Company will not be required to redeem any Shares or shares of non-voting or other common stock in violation of applicable laws. An Election shall be irrevocable. The withheld Shares and other shares tendered in payment should be valued at their fair market value on the date that the withholding obligation arises (the "Tax Date"). The Committee may disapprove of any Election, suspend, or terminate the right to make Elections or provide that the right to make Elections shall not apply to particular grants, Shares or exercises. If a Key Person is a person subject to Section 16 of the Exchange Act and such Key Person intends to satisfy all or any portion of such withholding obligation by directing the withholding of Shares issuable or tendering Shares, then (1) any Election by such Key Person must be made (i) at least six (6) months prior to the relevant Tax Date, or (ii) on or prior to the relevant Tax Date and during a period that begins on the third business day following the date of release for publication of the Company's quarterly or annual summary statements of sales and earnings and that ends on the twelfth business day following such date, and (2) the Election may not be made with respect to an exercise, or the withholding obligation arising thereon, if the relevant Non-Qualified Option was granted six (6) months or less prior to the date of Election. The Committee may impose any other conditions or restrictions on the right to make an Election as it shall deem appropriate. If the Key Person has informed the Company in writing that such withholding would subject such Key Person to liability under Section 16(b) of the Exchange Act, the Company shall not be authorized to effect any such withholding without the prior written consent of the Key Person. The Committee may prescribe such rules as it determines with respect to Key Persons subject to the reporting requirements of Section 16(a) of the Exchange Act to effect such tax withholding in compliance with the rules established by the Securities and Exchange Commission (the "Commission") under Section 16 of the Exchange Act and the positions of the staff of the Commission thereunder expressed in no-action letters exempting such tax withholding from liability under Section 16(b) of the Exchange Act. XVIII. LISTING OF SHARES AND RELATED MATTERS Upon the consummation of a public offering of voting common stock of the Company which is underwritten on a firm commitment basis by a nationally recognized investment banking firm, (i) each granted but unexercised Option shall be deemed from the date thereof to be an option to purchase voting common stock of the Company instead of an option to purchase nonvoting common stock of the Company, and (ii) all Options granted after the date thereof shall be options to purchase voting common stock of the Company and not nonvoting common stock of the Company. If at any time the Board of Directors shall determine in its discretion that the listing, registration or qualification of the Shares covered by the Plan upon any national securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the sale or purchase of Shares under the Plan, no Shares shall be issued unless and until such listing, 13 registration, qualification, consent or approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Board of Directors. During such suspension of the issuance of Shares, neither the Company not its parents or subsidiaries shall be liable for any payment of interest or fees of any kind on Shares not yet issued. Under no circumstances shall the Company be required to effect any registration or qualification of any Shares under any federal or state securities laws. XIX. AMENDMENT OF THE PLAN The Board of Directors or the Committee, as the case may be, may, from time to time, amend the Plan, provided that no amendment shall be made, without the approval of the stockholders of the Company, that will (i) increase the total number of Shares reserved for Options under the Plan (other than an increase resulting from an adjustment provided for in Article XIII), (ii) reduce the exercise price of any Option granted hereunder below the price required by Article VI, (iii) modify the provisions of the Plan relating to eligibility, (iv) materially increase the benefits accruing to participants under the Plan, (v) increase the number of Shares which may be granted to an individual Key Employee under the Plan, (vi) adversely affect the Plan's qualification under Section 162(m)(4)(C) of the Code, (vii) adversely affect the qualification of Incentive Options under Section 422 of the Code, or (viii) otherwise materially modify the Plan. The Committee shall be authorized to amend the Plan and the Options granted thereunder to permit the Incentive Options granted thereunder to qualify as incentive stock Options within the meaning of Section 422 of the Code and to qualify the Plan under Section 162(m)(4)(C) of the Code. The rights and obligations under any Option granted before amendment of the Plan or any unexercised portion of such Option shall not be adversely affected by amendment of the Plan or the Option without the consent of the holder of the Option. XX. TERMINATION OR SUSPENSION OF THE PLAN The Board of Directors may at any time suspend or terminate the Plan. The Plan, unless sooner terminated by action of the Board of Directors, shall terminate at the close of business on the Termination Date. An Option may not be granted while the Plan is suspended or after it is terminated. Rights and obligations under any Option granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except upon the consent of the person to whom the Option was granted. The power of the Committee to construe and administer any Options granted prior to the termination or suspension of the Plan under Article III nevertheless shall continue after such termination or during such suspension. XXI. SAVINGS PROVISION With respect to persons subject to Section 16 of the Exchange Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the Plan or action by the Committee fails to comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 14 XXII. GOVERNING LAW The Plan, such Options as may be granted thereunder and all related matters shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware from time to time obtaining. XXIII. PARTIAL INVALIDITY The invalidity or illegality of any provision herein shall not be deemed to affect the validity of any other provision. XXIV. EFFECTIVE DATE OF AMENDMENT AND RESTATEMENT OF THE PLAN The Plan as set forth herein constitutes an amendment and restatement of the Trident NGL Holding, Inc. Amended and Restated 1991 Stock Option Plan, as previously adopted by Trident NGL Holding, Inc. (a predecessor to the Company). This amendment and restatement of the Plan shall be effective as of May 10, 1996, provided this amendment and restatement of the Plan is approved by the stockholders of the Company on such date at the Company's 1996 Annual Meeting of Stockholders./2/ - ----------- /2/ The referenced amendment and restatement of the Plan was effective as of May 10, 1996. This version of the Plan reflects all amendments to the Plan through August 20, 1998, including, without limitation, the amendments implemented to reflect the corporate name change from "NGC Corporation" to "Dynegy Inc." 15 EX-10.4 3 1998 U.K. STOCK OPTION PLAN EXHIBIT 10.4 DYNEGY INC. 1998 U.K. STOCK OPTION PLAN CLIFFORD CHANCE 200 Aldersgate St. London EC1A 4JJ Telephone: 0171-600-1000 Fax: 0171-600-5555 Reference: DPP/N2791/00023/RTT Inland Revenue Reference No.: X19245 DYNEGY INC. 1998 U.K. STOCK OPTION PLAN 1. DEFINITIONS AND INTERPRETATION. ------------------------------ (1) The following expressions shall have the following meanings in the 1998 Plan unless the context otherwise requires: "APPROVED STOCK OPTION" means an option granted in accordance with the 1998 Plan. "INLAND REVENUE" means the United Kingdom's Commissioners of Inland Revenue. "PARTICIPANT" means a person who holds an Approved Stock Option. "PARTICIPATING COMPANY" means the Company or a Subsidiary of the Company. "SCHEDULE 9" means Schedule 9 to the Taxes Act. "SUBSIDIARY" means a body corporate, whether now or hereafter existing which is (a) a subsidiary of the Company within the meaning of Section 736 of the United Kingdom Companies Act of 1985, and is (b) under the control of the Company within the meaning of Section 840 of the Taxes Act. "TAXES ACT" means the United Kingdom's Income and Corporation Taxes Act 1988. "1998 PLAN" means the Dynegy Inc. 1998 U.K. Stock Option Plan as herein set out but subject to any alterations or additions made under Rule 8 below. "1991 PLAN" means the Dynegy Inc. Amended and Restated 1991 Stock Option Plan (a copy of which is annexed as a schedule to the 1998 Plan). (2) Unless the context otherwise requires, all expressions used in the 1998 Plan shall have the same meanings as those ascribed to them in the 1991 Plan, save that: "FAIR MARKET VALUE" means Market Value. "MARKET VALUE" shall have the meaning ascribed to it in Rule 5(3) below. "KEY EMPLOYEE" AND "KEY PERSON" shall be limited to the persons who are eligible to be granted an Approved Stock Option as set out in Rule 3 below. "OPTION" includes an Approved Stock Option as defined in Sub-rule (1) above. "RELATED ENTITY" shall be limited to subsidiaries. (3) Expressions not otherwise defined herein have the same meanings as they have in Schedule 9. (4) Any reference herein to any enactment includes a reference to that enactment as from time to time modified, extended or reenacted. 2. TERMS AND PROVISIONS OF THE 1998 PLAN. The terms and provisions of the 1998 Plan shall be the same mutatis mutandis as the terms and provisions of the 1991 Plan save as hereinafter specified. 3. ELIGIBILITY. (1) Subject to Sub-rule (3) below, a person is eligible to be granted an Approved Stock Option if (and only if) he/she is a full-time director or qualifying employee of a Participating Company. (2) For the purposes of Sub-rule (1) above: (a) a person shall be treated as a full-time director of a Participating Company if he/she is obliged to devote to the performance of the duties of his/her office or employment with that and any other Participating Company not less than twenty-five (25) hours a week (excluding meal breaks); (b) a qualifying employee, in relation to a Participating Company, is an employee of the Participating Company (other than one who is a director of a Participating Company). (3) A person is not eligible to be granted an Option under the 1998 Plan at any time when he/she is not eligible to participate in the 1998 Plan by virtue of Paragraph 8 of Schedule 9. 4. GRANT OF OPTIONS. (1) Subject to Sub-rule (3) below, the Committee may grant to any person who is eligible to be granted an Option under the 1998 Plan an Approved Stock Option to acquire shares which satisfy the requirements of Paragraphs 10 to 14 of Schedule 9, upon the terms set out in the 1998 Plan and upon such other objective terms as the Committee may reasonably specify. (2) The grant of an Approved Stock Option shall be subject to obtaining any approval or consent which may be required under the provisions of any regulation or enactment. (3) No person shall be granted an Approved Stock Option under the 1998 Plan which would, at the time it is granted, cause the aggregate Market Value of the shares which he/she may acquire in pursuance of options granted to him/her under the 1998 Plan and options granted to him/her under any other share option scheme, not being a savings-related share option scheme, approved under Schedule 9 and established by the Company or by any associated company of the Company (and not exercised) to exceed or further exceed (Pounds)30,000. (4) For the purposes of Sub-rule (3) above, the aggregate Market Value of the shares in relation to which an option was granted shall be calculated: (a) in the case of an Approved Stock Option granted under the 1998 Plan, as on the day by reference to which the price at which shares may be acquired by the exercise thereof is determined as mentioned in Rule 5(2) below; (b) in the case of an option granted under any other approved scheme, as at the time when it was granted or, in a case where an agreement relating to the shares has been made under Paragraph 29 of Schedule 9, such earlier time or times as may be provided in the agreement; and (c) in the case of any other option, as on the day or days by reference to which the price at which shares may be acquired by the exercise thereof was determined. (5) Unless otherwise agreed with the Inland Revenue, the United States dollar exchange rate for pounds sterling for the purposes of calculating the limit in Sub-rule (3) above shall be the noon buying rate in the City of London on the day by reference to which the price at which shares may be acquired on the exercise of the Option is determined as mentioned in Rule 5(2) below. 5. EXERCISE PRICE AND CONSIDERATION. (1) Shares shall be issued to the Participant pursuant to the exercise of an Approved Stock Option only upon receipt by the Company from the Participant of payment in full in cash. (2) The exercise price per share under each Approved Stock Option granted by the Committee shall be such price as is determined by the Committee before the grant thereof, provided that it shall not be less than the higher of: (a) the exercise price calculated in accordance with the provisions of Article VI of the 1991 Plan; and (b) one hundred percent (100%) of the Market Value per share on the date of grant (or such other dealing day not being more than thirty (30) days earlier than the date of grant of the Approved Stock Option as may be agreed with the Inland Revenue). (3) The Market Value per share on any day shall be determined as follows: (a) if shares of the same class as the shares are quoted on the New York Stock Exchange, the Market Value per share shall be the closing price per share in the New York Stock Exchange on the consolidated transaction reporting system on that day (and if there shall be no sale of shares reported on such date, the Market Value shall be deemed equal to the closing price per share on the consolidated transaction reporting system for the last preceding date on which sales of shares were reported; (b) if Paragraph (a) above does not apply, the Market Value shall be equal to the market value (within the meaning of Part VIII of the United Kingdom's Taxation of Chargeable Gains Act 1992) of shares, as agreed in advance for the purposes of the 1998 Plan with the Shares Valuation Division of the Inland Revenue, on that day. 6. EXERCISE OF OPTIONS. (1) Any Approved Stock Option granted under the 1998 Plan shall be exercisable at such times, in such amounts and during such period or periods as the Committee shall determine at the date of the grant of such Option. (2) A person is not eligible to exercise an Approved Stock Option granted under the 1998 Plan at any time when he/she not eligible to participate in the 1998 Plan by virtue of Paragraph 8 of Schedule 9. (3) The Committee shall not have authority, in lieu of requiring a cash payment from the Participant upon exercise of an Approved Stock Option granted under the 1998 Plan, to provide the establishment of procedures as set out in Paragraph (a) of Article III of the 1991 Plan or to provide an arrangement through registered broker-dealers as set out in Paragraph (b) of Article III of the 1991 Plan. (4) All shares allotted under the 1998 Plan shall rank pari passu in all respects with the shares of the same class for the time being in issue save as regards any rights attaching to such shares by reference to a record date prior to the date of the allotment. 7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. (1) Article XIII of the 1991 Plan shall apply to Approved Stock Options granted under the 1998 Plan in respect of a variation of share capital of the Company only, save that no adjustment under that Article XIII shall be made to an Approved Stock Option at a time when the 1998 Plan is approved by the Inland Revenue under Schedule 9: (a) without the prior approval of the Inland Revenue; and (b) unless such adjustment is permitted by Paragraph 29 of Schedule 9. (2) In addition to the rights of exercise arising under Article XIII of the 1991 Plan in the event of a change in control, if any company (the "Acquiring Company") obtains control of the Company as a result of making: (a) a general offer to acquire the whole of the Company stock which is made on a condition such that if it is satisfied, the person making the offer will have control of the Company, or (b) a general offer to acquire all the shares in the Company which are of the same class as the shares which may be acquired by the exercise of Options granted under the 1998 Plan. Any Participant may, at any time within the appropriate period (which expression shall be construed in accordance with Paragraph 15(2) of Schedule 9), by agreement with the Acquiring Company, release any Option granted under the 1998 Plan which has not lapsed (the "Old Option") in consideration of the grant to him of an option (the "New Option") which (for the purposes of that paragraph) is equivalent to the Old Option but relates to shares in a different company (whether the Acquiring Company itself or some other company falling within Paragraph 10(b) or (c) of Schedule 9). (3) The New Option shall not be regarded for the purposes of Sub-rule (2) above as equivalent to the Old Option unless the conditions set out in Paragraph 15(3) of Schedule 9 are satisfied, but so that the provisions of the 1998 Plan shall for this purpose be construed as if: (a) the New Option were an Option granted under the 1998 Plan at the same time as the Old Option; (b) except for the purposes of the definitions of "Participating Company" and "Subsidiary" in Rule 1 above and the references to the "Committee" in Rule 4(1) above, the references to the "Company" in the 1991 Plan were references to the different company mentioned in Sub- rule (2) above. 8. ADMINISTRATION, AMENDMENT AND TERMINATION OF THE 1998 PLAN. (1) The provisions of Article III and Article XIX of the 1991 Plan shall apply mutatis mutandis to the 1998 Plan, save that: (a) if, at a time when the 1998 Plan is approved by the Inland Revenue under Schedule 9, an amendment is made to the 1998 Plan or to the 1991 Plan that shall apply to the 1998 Plan or to the terms of an Approved Stock Option (save for an amendment which solely relates to a special term subject to which the Option has been granted), the approval will not thereafter have effect until the Inland Revenue have approved the alteration or addition; (b) the Committee shall not have the authority to require, as a condition of the granting of any Approved Stock Option, that an employee recipient agree that in the event of termination of employment of such employee, other than as a result of dismissal without cause, such employee will not, for a period to be fixed at the time of the grant of the Option, enter into any other employment or participate directly or indirectly in any other business or enterprise which is competitive with the business of the Company or any Related Entity, or enter into any employment in which such employee will be called upon to utilize special knowledge obtained through employment with the Company or any Related Entity. (c) the Committee shall not have the authority to require, as a condition to the granting of any Approved Stock Option, that the person receiving such Option agree not to sell or otherwise dispose of any Company stock acquired pursuant to such Option for a period of six (6) months following the later of (i) the date of the grant of such Option or (ii) the date when the exercise price of such Option is fixed if such exercise price is not fixed at the date of grant of such Option; (d) no alteration which solely related to a special term subject to which an Approved Stock Option has been granted shall be made unless: (i) there shall have occurred an event which shall have caused the Committee acting fairly and reasonably to consider that the special term would not, without the alteration, achieve its original purpose; and (ii) the alteration shall not have the effect of making the special term materially more difficult to satisfy than it was prior to the making of such alteration. (e) any reference in this Sub-rule (1) to a special term subject to which an Approved Stock Option has been granted is a reference to an objective term specified by the Committee as mentioned in Sub-rule (1) of Rule 4 above. (2) As soon as reasonably practicable after making any amendment to the 1998 Plan under Sub-rule (1) above, the Committee shall give notice in writing thereof to any Participant affected thereby and, if the 1998 Plan is then approved by the Inland Revenue under Schedule 9, to the Inland Revenue. SCHEDULE RULES OF THE 1991 PLAN EX-10.5 4 AMENDED AND RESTATED EMPLOYEE EQUITY OPTION PLAN EXHIBIT 10.5 DYNEGY INC. EMPLOYEE EQUITY OPTION PLAN [AS AMENDED THROUGH AUGUST 20, 1998] I. PURPOSE OF THE PLAN The DYNEGY INC. EMPLOYEE EQUITY OPTION PLAN (the "Plan") is intended to provide a means whereby certain employees of Dynegy Inc., a Delaware corporation (the "Company"), and its affiliates may develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to remain with and devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its shareholders. Accordingly, the Company may grant to certain employees ("Optionees") the option ("Option") to purchase shares of the common stock of the Company ("Stock"), as hereinafter set forth. Options granted under the Plan shall not constitute incentive stock options, within the meaning of Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"). The Plan as set forth herein constitutes an amendment and restatement of the Plan as previously adopted by the Company, and shall supersede and replace in its entirety such previously adopted plan./1/ II. ADMINISTRATION The Plan shall be administered by a committee (the "Committee") of, and appointed by, the Board of Directors of the Company (the "Board"), and the Committee shall be comprised solely of two or more individuals who qualify as (a) outside directors (within the meaning of Section 162(m) of the Code and applicable interpretive authority thereunder), and (b) non-employee directors (as defined in Rule 16b-3, as currently in effect or as hereinafter modified or amended ("Rule 16b-3"), promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act")). The Committee shall have sole authority to select the Optionees from among those individuals eligible hereunder and to establish the number of shares which may be issued under each Option; provided, however, that, notwithstanding any provision in the Plan to the contrary, the maximum number of shares that may be subject to Options granted under the Plan to an individual Optionee during any calendar year beginning on or after January 1, 1994, may not exceed 2,217,360 (subject to adjustment after May 21, 1998, in the same manner as provided in Paragraph IX hereof with respect to shares of Stock subject to Options then outstanding). The limitation set forth in the preceding sentence shall be applied in a manner that will permit compensation generated under the Plan that is intended to constitute "performance-based" compensation for purposes of Section 162(m) of the Code to so qualify, including, without limitation, counting against such maximum number of shares, to the extent required under - ------------------- /1/ The referenced amendment and restatement of the Plan was effective as of May 21, 1998. This version of the Plan reflects all amendments to the Plan through August 20, 1998, including, without limitation, the amendments implemented to reflect the corporate name change from "NGC Corporation" to "Dynegy Inc." Section 162(m) of the Code and applicable interpretive authority thereunder, any shares subject to Options that are canceled or repriced. In selecting the Optionees from among individuals eligible hereunder and in establishing the number of shares that may be issued under each Option, the Committee may take into account the nature of the services rendered by such individuals, their present and potential contributions to the Company's success and such other factors as the Committee in its discretion shall deem relevant. The Committee is authorized to interpret the Plan and may from time to time adopt such rules and regulations, consistent with the provisions of the Plan, as it may deem advisable to carry out the Plan. All decisions made by the Committee in selecting the Optionees and in establishing the number of shares which may be issued under each Option shall be final. III. ELIGIBILITY OF OPTIONEE (a) Options may be granted only to individuals who are employees (including officers and directors who are also employees) of the Company or any affiliate of the Company at the time the Option is granted. Options may be granted to the same individual on more than one occasion. (b) For all purposes under the Plan, an affiliate of the Company shall mean any corporation, partnership, limited liability company or partnership, association, trust or other organization which, directly or indirectly, controls, is controlled by, or is under common control with, the Company. For purposes of the preceding sentence, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any entity or organization, shall mean the possession, directly or indirectly, of the power (i) to vote more than 50% of the securities having ordinary voting power for the election of directors of the controlled entity or organization, or (ii) to direct or cause the direction of the management and policies of the controlled entity or organization, whether through the ownership of voting securities or by contract or otherwise. IV. SHARES SUBJECT TO THE PLAN The aggregate number of shares which may be issued under Options granted under the Plan shall not exceed 14,752,755 shares of Stock, which shall include all shares of Stock subject to, and issued under, Options granted prior to the effective date of this amendment and restatement of the Plan. Such shares may consist of authorized but unissued shares of Stock or previously issued shares of Stock reacquired by the Company. Any of such shares which remain unissued and which are not subject to outstanding Options at the termination of the Plan shall cease to be subject to the Plan, but, until termination of the Plan, the Company shall at all times make available a sufficient number of shares to meet the requirements of the Plan. Should any Option hereunder expire or terminate prior to its exercise in full, the shares theretofore subject to such Option may again be subject to an Option granted under the Plan to the extent permitted under Rule 16b-3, and the purchase price of Stock issued under such Option shall be determined in accordance with the provisions of Paragraph V hereof. The aggregate number of shares which may be issued under the Plan shall be subject to adjustment after May 21, 1998, in the same manner as provided in Paragraph IX hereof with respect to shares of Stock subject to Options 2 then outstanding. Exercise of an Option in any manner shall result in a decrease in the number of shares of Stock which may thereafter be available, both for purposes of the Plan and for sale to any one individual, by the number of shares as to which the Option is exercised. V. OPTION PRICE The purchase price of Stock issued under each Option shall be determined by the Committee, but such purchase price shall not be less than $5.66 per share of Stock except as hereinafter provided. As of May 21, 1998, Options with respect to 4,417,492 shares of Stock are outstanding with a purchase price of $2.028 per share of Stock and Options with respect to 136,681 shares of Stock are outstanding with a purchase price of $2.13 per share of Stock (each such Option is herein referred to as an "Original Option"). If any Original Option expires or terminates prior to its exercise in full and the shares theretofore subject to such Original Option are again made subject to an Option (the "Replacement Option") pursuant to Paragraph IV hereof, then the purchase price of Stock issued under such Replacement Option shall be determined by the Committee, but such purchase price shall not be less than (a) $2.028 per share of Stock in the case of a Replacement Option that relates to an expired or terminated Original Option with such purchase price or (b) $2.13 per share of Stock in the case of a Replacement Option that relates to an expired or terminated Original Option with such purchase price. The purchase prices set forth in this Paragraph V shall be subject to adjustment after May 21, 1998, by the Committee applying the principles set forth in Paragraph IX hereof. VI. OPTION AGREEMENTS; TRANSFERABILITY; WITHHOLDING (a) Each Option shall be evidenced by a written agreement between the Company and the Optionee ("Option Agreement") which shall contain such terms and conditions as may be approved by the Committee and are not inconsistent with the provisions of the Plan. The terms and conditions of the respective Option Agreements need not be identical. In the event of a conflict or inconsistency between the provisions of the Plan and the terms of any Option Agreement, the provisions of the Plan shall govern and control. (b) Each Option and all rights granted thereunder shall not be transferable other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder, and shall be exercisable during the Optionee's lifetime only by the Optionee or the Optionee's guardian or legal representative. (c) To the extent that the exercise of an Option granted under the Plan or the disposition of shares of Stock acquired by exercise of an Option granted under the Plan results in compensation income to an Optionee for federal, state or local income tax purposes, such Optionee shall pay to the Company at the time of such exercise or disposition such amount of money as the Company may require to meet its obligation under applicable tax laws or regulations, and, if such Optionee fails to do so, the Company is authorized to withhold from any remuneration then or thereafter payable to such Optionee any tax required to be withheld by reason of such resulting compensation income. Upon an exercise by an Optionee of an Option 3 granted under the Plan, the Company is further authorized in its discretion to satisfy any such withholding requirement out of any cash or shares of Stock distributable to such Optionee upon such exercise. VII. VESTING AND CANCELLATION OF OPTIONS (a) Each Option granted under the Plan shall vest and become immediately exercisable in accordance with the terms hereof on the fifth anniversary of the date of grant of such Option. (b) Subsequent to the vesting of an Option granted hereunder, the unexercised portion thereof shall automatically and without notice terminate and become null and void on the earliest to occur of the following: (i) the tenth anniversary of the date of grant of such Option; (ii) the expiration of 95 days from the date of termination of the Optionee's employment with the Company for any reason (other than a termination described in clauses (iii) or (iv) below); provided, that if the Optionee shall die during such 95-day period, the time of termination of the unexercised portion of such Option shall be determined pursuant to clause (iii) below; (iii) the expiration of 12 months after an Optionee's death or the date such Optionee's employment with the Company terminates by reason of disability (within the meaning of subparagraph (d)(ii) below); and (iv) the termination of the Optionee's employment with the Company in the event such termination results from the discharge for cause of such Optionee. For purposes of the Plan, "discharge for cause" shall have the meaning set forth in each Optionee's employment agreement with the Company. If an Optionee does not have an employment agreement with the Company, the term "discharge for cause" shall mean the involuntary termination of an Optionee's employment with the Company as a result of dishonesty or similar serious misconduct directly related to the performance of duties for the Company which results from a willful act or omission and which is materially injurious to the operations, financial condition or business reputation of the Company or any of its affiliates, including but not limited to (1) refusal to follow the instructions of the President of the Company, the Board, or the Optionee's superior officer in the performance of the Optionee's duties, or (2) impairment of the discharge of the Optionee's duties due to adverse consequences resulting from becoming a defendant in any criminal proceeding or due to drug or alcohol abuse. (c) Any Option granted hereunder which is not vested pursuant to subparagraph (a) above shall automatically and without notice terminate and become null and void as hereinafter set forth: 4 (i) In the event an Optionee's employment with the Company terminates by reason of death or disability (within the meaning of subparagraph (d)(ii) below), each Option held by such Optionee shall immediately terminate with respect to the percentage of shares of Stock subject to such Option as set forth below directly opposite the period during which the death or disability of such Optionee occurs: PERCENTAGE DATE OF DEATH OR DISABILITY TERMINATED --------------------------- ---------- Date of Grant - 1st anniversary of 80% date of grant - 1 day 1st Anniversary - 2nd anniversary of 60% date of grant - 1 day 2nd Anniversary - 3rd anniversary of 40% date of grant - 1 day 3rd Anniversary - 4th anniversary of 20% date of grant - 1 day 4th Anniversary - 5th anniversary of 10% date of grant - 1 day The portion of an Option that is not terminated shall immediately vest and shall be subject to the termination provisions of clauses (i) and (iii) of subparagraph (b) above. (ii) In the event an Optionee voluntarily resigns his employment with the Company prior to attaining age 62 or is discharged for cause, all of such Optionee's Options shall be terminated immediately upon notice of such resignation or discharge. (iii) In the event an Optionee voluntarily retires from employment with the Company on or after attaining age 62 or his employment with the Company is involuntarily terminated by the Company (or one of its affiliates) other than pursuant to a discharge for cause, each Option held by such Optionee shall immediately terminate with respect to the percentage of shares of Stock subject to such Option set forth below directly opposite the period during which such termination occurs: 5 PERCENTAGE DATE OF TERMINATION TERMINATED ------------------- ---------- Date of Grant - 1st anniversary of 100% date of grant - 1 day 1st Anniversary - 2nd anniversary of 80% date of grant - 1 day 2nd Anniversary - 3rd anniversary of 60% date of grant - 1 day 3rd Anniversary - 4th anniversary of 40% date of grant - 1 day 4th Anniversary - 5th anniversary of 20% date of grant - 1 day The portion of an Option that is not terminated shall immediately vest and shall be subject to the termination provisions of clauses (i) and (ii) of subparagraph (b) above. (d) For all purposes of the Plan, (i) an Optionee shall be considered to be in the employment of the Company as long as such Optionee remains an employee of either the Company or any affiliate of the Company, or a corporation or any affiliate of such corporation assuming or substituting a new option for the Option granted to such Optionee, and (ii) an Optionee shall be considered to be disabled if such Optionee is eligible to receive disability benefits under the Company's long-term disability plan or Social Security disability benefits if such Optionee's employment with the Company terminates at a time when the Company does not maintain a long-term disability plan or such plan does not provide coverage to such Optionee. (e) The Committee may, in its sole discretion, (i) extend the time period during which an Option may be exercised following a termination of employment referred to in clauses (ii), (iii) or (iv) of subparagraph (b) above, and/or (ii) accelerate the vesting of all or any portion of an Option that would otherwise terminate pursuant to subparagraph (c) above. Any action by the Committee pursuant to this subparagraph (e) may vary among individual Optionees and may vary among Options held by an individual Optionee. VIII. TERM OF PLAN The Plan originally became effective on May 19, 1992. This restatement of the Plan shall be effective as provided in Paragraph I hereof./2/ Except with respect to Options then outstanding, if not sooner terminated under the provisions of Paragraph X, the Plan shall terminate upon and no further Options shall be granted after May 18, 2002. - ----------------------------- /2/ See footnote 1. 6 IX. RECAPITALIZATION OR REORGANIZATION (a) The existence of the Plan and the Options granted hereunder shall not affect in any way the right or power of the Board or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding. (b) The shares with respect to which Options may be granted are shares of Stock as presently constituted, but if, and whenever, prior to the expiration of an Option theretofore granted, the Company shall effect a subdivision or consolidation of shares of Stock or the payment of a stock dividend on Stock without receipt of consideration by the Company, the number of shares of Stock with respect to which such Option may thereafter be exercised (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and the purchase price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and the purchase price per share shall be proportionately increased. (c) If the Company recapitalizes, reclassifies its capital stock, or otherwise changes its capital structure (a "recapitalization"), the number and class of shares of Stock covered by an Option theretofore granted shall be adjusted so that such Option shall thereafter cover the number and class of shares of stock and securities to which the Optionee would have been entitled pursuant to the terms of the recapitalization if, immediately prior to the recapitalization, the Optionee had been the holder of record of the number of shares of Stock then covered by such Option. If (i) the Company shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity), (ii) the Company sells, leases or exchanges all or substantially all of its assets to any other person or entity, (iii) the Company is to be dissolved and liquidated, (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the 1934 Act, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company's voting stock (based upon voting power), or (v) as a result of or in connection with a contested election of directors, the persons who were directors of the Company before such election shall cease to constitute a majority of the Board (each such event is referred to herein as a "Corporate Change"), no later than (a) ten days after the approval by the shareholders of the Company of such merger, consolidation, reorganization, sale, lease or exchange of assets or dissolution or such election of directors or (b) thirty days after a change of control of the type described in Clause (iv), the Committee, acting in its sole discretion without the consent or approval of any Optionee, shall act to effect one or more of the following alternatives, which may vary among individual Optionees and which may vary among Options held by any individual Optionee: (1) accelerate the time at which Options then outstanding may be exercised so that such Options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change) fixed by the Committee, after which specified date all unexercised Options 7 and all rights of Optionees thereunder shall terminate, (2) require the mandatory surrender to the Company by selected Optionees of some or all of the outstanding Options held by such Optionees (irrespective of whether such Options are then exercisable under the provisions of the Plan) as of a date, before or after such Corporate Change, specified by the Committee, in which event the Committee shall thereupon cancel such Options and the Company shall pay to each Optionee an amount of cash per share equal to the excess, if any, of the amount calculated in Subparagraph (d) below (the "Change of Control Value") of the shares subject to such Option over the exercise price(s) under such Options for such shares, (3) make such adjustments to Options then outstanding as the Committee deems appropriate to reflect such Corporate Change and to keep the holders of such Options in as nearly the same position as possible to that which they were in prior to such Corporate Change (provided, however, that the Committee may determine in its sole discretion that no adjustment is necessary to Options then outstanding) or (4) provide that the number and class of shares of Stock covered by an Option theretofore granted shall be adjusted so that such Option shall thereafter cover the number and class of shares of stock or other securities or property (including, without limitation, cash) to which the Optionee would have been entitled pursuant to the terms of the agreement of merger, consolidation or sale of assets and dissolution if, immediately prior to such merger, consolidation or sale of assets and dissolution, the Optionee had been the holder of record of the number of shares of Stock then covered by such Option. (d) For the purposes of clause (2) in Subparagraph (c) above, the "Change of Control Value" shall equal the amount determined in clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the per share price offered to shareholders of the Company in any such merger, consolidation, reorganization, sale of assets or dissolution transaction, (ii) the price per share offered to shareholders of the Company in any tender offer or exchange offer whereby a Corporate Change takes place, or (iii) if such Corporate Change occurs other than pursuant to a tender or exchange offer, the fair market value per share of the shares into which such Options being surrendered are exercisable, as determined by the Committee as of the date determined by the Committee to be the date of cancellation and surrender of such Options. In the event that the consideration offered to shareholders of the Company in any transaction described in this Subparagraph (d) or Subparagraph (c) above consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash. (e) Any adjustment provided for in Subparagraphs (b) or (c) above shall be subject to any required shareholder action. (f) Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to Options theretofore granted or the purchase price per share. 8 X. AMENDMENT OR TERMINATION OF THE PLAN The Board in its discretion may terminate the Plan at any time with respect to any shares for which Options have not theretofore been granted. The Board or the Committee shall have the right to alter or amend the Plan or any part thereof from time to time; provided, that no change in any Option theretofore granted may be made which would impair the rights of the Optionee without the consent of such Optionee; and provided, further, that (i) neither the Board nor the Committee may make any alteration or amendment which would decrease any authority granted to the Committee hereunder in contravention of Rule 16b-3 and (ii) neither the Board nor the Committee may make any alteration or amendment which would materially increase the benefits accruing to participants under the Plan, increase the aggregate number of shares which may be issued pursuant to the provisions of the Plan, change the class of individuals eligible to receive Options under the Plan or extend the term of the Plan, without the approval of the shareholders of the Company. XI. SECURITIES LAWS (a) The Company shall not be obligated to issue any Stock pursuant to any Option granted under the Plan at any time when the offering of the shares covered by such Option have not been registered under the Securities Act of 1933 and such other state and federal laws, rules or regulations as the Company or the Committee deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules or regulations available for the offering and sale of such shares. (b) It is intended that the Plan and any grant of an Option made to a person subject to Section 16 of the 1934 Act meet the requirements of Rule 16b-3 so that any transaction under the Plan involving a grant, award or other acquisition from the Company or disposition to the Company is exempt from Section 16(b) of the 1934 Act. If any provision of the Plan or any such Option would result in any such transaction not being exempt from Section 16(b) of the 1934 Act, such provision or Option shall be construed or deemed amended so that such transaction will be exempt from Section 16(b) of the 1934 Act. XII. MISCELLANEOUS (a) The Plan and all actions taken pursuant to the Plan shall be governed by, and construed in accordance with, the laws of the State of Texas, applied without regard to conflict of laws principles thereof. (b) The invalidity or unenforceability of any one or more provisions of the Plan shall not affect the validity or enforceability of any other provision of the Plan, which shall remain in full force and effect. 9 EX-10.11 5 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT EXHIBIT 10.11 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This First Amendment to the Employment Agreement (this "Amendment") between John U. Clarke and NGC Corporation (n/k/a Dynegy Inc.) dated April 8, 1997 (the "Employment Agreement") is entered into this 11th day of December, 1998, by and between Dynegy Inc., a Delaware corporation ("Dynegy") and John U. Clarke. WHEREAS, the Compensation, Corporate Governance and Human Resources Committee of the Board of Directors of Dynegy has recommended certain amendments to the Change of Control provisions and certain other provisions of the Employment Agreement; and WHEREAS, the Board of Directors has approved such amendments; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. The first sentence of the first paragraph of Paragraph 2(c) of the Employment Agreement shall be amended by deleting the last clause ", provided however, that such payment shall not be greater than 2.99 times the sum of your base salary plus guaranteed annual bonus at the time of your termination." 2. The first sentence of the second paragraph of Paragraph 2(c) of the Employment Agreement shall be amended by (a) deleting the phrase "or as the result of the change in control of the Company," from clause (ii), (b) deleting the word "or" before clause (iii), and (c) by adding a new clause (iv) to read as follows "; or (iv) a change in control of the Company occurs." In addition, the following proviso shall be added to the definition of "change in control of the Company"; "provided, however, a 'change in control of the Company' shall not be deemed to have occurred if Chevron, its subsidiaries and/or affiliates own, directly or indirectly, more than 50% of the total voting stock of the Company, so long as Chevron, its subsidiaries or affiliates reduce their ownership interest back below 50% within six months of the date that they acquire a greater than 50% ownership interest and so long as Dynegy remains a publicly traded company during such six month period." 3. All provisions of the Employment Agreement shall remain in full force and effect except as modified by this Amendment. 4. Capitalized terms used in this Amendment and not otherwise defined in this Amendment shall have the meaning ascribed to such terms in the Employment Agreement. IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date first set forth above. DYNEGY INC. By: /s/ C.L. Watson -------------------------- C.L. Watson, Chairman AGREED AND ACCEPTED this 11th day of December, 1998. /s/ John U. Clarke - ---------------------------- John U. Clarke EX-10.12A 6 EMPLOYMENT AGREEMENT JULY 1, 1997 EXHIBIT 10.12A Dynegy Inc 1000 Louisiana Street, Suite 5800 Houston, Texas 77002 Phone 713-507-6400 www.dynegy.com July 1, 1997 [LOGO OF DYNEGY APPEARS HERE] Mr. Dan Ryser 4803 Big Falls Kingwood, TX 77345 Dear Dan: Subject to the ratification of this Agreement by the Compensation, Corporate Governance and Human Resources Committee ("Compensation Committee") of the Board of Directors of NGC Corporation, set forth below are the terms of your employment by NGC Corporation (hereinafter referred to collectively as "NGC" or the "Company"). 1. TITLE AND DUTIES Your title shall be President and Chief Operating Officer of Destec Energy, Inc., soon to be a wholly-owned subsidiary of NGC and Senior Vice President of NGC Corporation. You shall have such other duties as may be delegated from time to time by your immediate supervisor. You shall devote your full time, energy and skill to the performance of your duties for NGC, and will exercise due diligence and reasonable care in the performance of such duties. 2. TERM (a) Unless earlier terminated as provided for herein, the term of this Agreement will be for three years, beginning on July 1, 1997 (the "Term"). (b) If your employment with NGC is terminated due to your voluntary resignation or by the Company for "cause", this Agreement shall terminate immediately (except for the confidentiality, non-competition and non- solicitation provisions of Paragraph 4), and the Company shall have no further obligation to you except for the payment of amounts due before the date of such termination. You further agree that the benefits which you have received from the execution of this Agreement through the date of such termination constitute sufficient consideration for your obligations pursuant to Paragraph 4, notwithstanding the fact that the Company has no further obligation to you except for the payment of amounts due before the date of such termination. For purposes of this Agreement, you may be terminated for "cause" as a result of (i) refusal to implement or adhere to policies or directives of the Board of Directors of NGC; (ii) serious misconduct, dishonesty or disloyalty, directly related to the performance of duties for the Company, which results from a willful act or omission or from gross negligence, and which is materially or is likely to be materially injurious to the operations, financial condition or business reputation of the Company or any significant subsidiary thereof; (iii) your being convicted (or entering into a plea bargain Mr. Dan Ryser July 1, 1997 Page 2 admitting criminal guilt) in any criminal proceeding that may have an adverse impact on the Company's reputation and standing in the community; (iv) drug or alcohol abuse; (v) willful and continued failure to perform your duties under this Agreement; or (vi) any other material breach of this Agreement by you that is not cured within thirty days after written notice of such breach is delivered to you from the Company. For these purposes, no act or failure to act shall be considered "willful" unless it is done, or omitted to be done, in bad faith without reasonable belief that the action or omission was in the best interest of the Company. (c) If your employment is terminated during the Term of this Agreement due to resignation following "constructive termination" (as defined below) or for any other reason other than your voluntary resignation, death, disability, or discharge for cause, you shall receive as your sole compensation (i) your Base Salary as described in Paragraph 3(a), guaranteed bonus as described in Paragraph 3(b) and company medical and life insurance coverage, all for the remainder of the Term, or for two years from the date of actual termination of employment, whichever provides the longer period of payment and coverage provided, and (ii) any employee stock options granted to you during the Term of this Agreement shall become vested as of the date of resignation due to such constructive termination or discharge not for cause, but only up to the percentage that would have been vested had you remained in regular employment to the end of the Term of this Agreement. For purposes of this Agreement a "constructive termination" shall be deemed to have occurred in the event that (i) your Base Salary as defined in Paragraph 3(a), bonus compensation under Paragraph 3(b), option grants under Paragraph 3(c) or other compensation as described in Paragraph 3(d) and 3(e) is reduced; (ii) a significant diminution in your responsibilities, authority or scope of duties is effected by the Board of Directors or as the result of the change in control of the Company, and such diminution is made without your written consent (without regard to whether or not any change is made to your title); or (iii) the Company materially breaches this Agreement. For purposes of this Agreement, a "change in control of the Company" means the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rule l3d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total voting stock of the Company; (b) the Company is merged with or into or consolidated with another person and, immediately after giving effect to the merger or consolidation, (A) less than 50% of the total voting power of the outstanding voting stock of the surviving or resulting person is then "beneficially owned" (within the meaning of Rule l3d-3 under the Exchange Act) in the aggregate by (x) the stockholders of the Company immediately prior to such merger or consolidation, or (y) if a record date has been set to determine the stockholders of the Company entitled to vote with respect to such merger or consolidation, the stockholders of the Company as of such record date and (B) any "person" or "group" (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act) has become the direct or indirect "beneficial owner" (as defined in Rule l3d-3 under the Exchange Act) of more than 50% of the voting power of the voting stock of the surviving or Mr. Dan Ryser July 1, 1997 Page 3 resulting person; (c) the Company, either individually or in conjunction with one or more of its subsidiaries, sells, assigns, conveys, transfers, leases or otherwise disposes of, or the subsidiaries sell, assign, convey, transfer, lease or otherwise dispose of, all or substantially all of the properties and assets of the Company and the subsidiaries, taken as a whole (either in one transaction or a series of related transactions), to any person (other than the Company or a wholly owned subsidiary); or (d) the liquidation or dissolution of the Company. Any resignation by you as a result of assertion of a constructive termination shall be communicated by delivery to the Board of Directors of the Company thirty days' advance written notice of such constructive termination and the grounds therefor, during which period the Company shall be entitled to cure or remedy the matters set forth in such notice to your reasonable satisfaction. Unless you withdraw such notice prior to the expiration of such thirty day period, such resignation shall take effect upon the expiration of thirty days from the date of the delivery of such notice. Any other resignation by you shall be communicated by thirty days' advance written notice. (d) If you die, or become disabled and cannot perform your duties, you (or your estate) shall be entitled to the Base Salary (as defined in Paragraph 3 (a)) payable to you hereunder for three months following the month in which you die or become disabled, plus the amount of any guaranteed bonus as described in Paragraph 3(b) guaranteed pursuant to Paragraph 3(b) for the year of death or disability, prorated through the date of death or disability. For purposes of this Agreement, you shall be disabled as of the first date on which you become eligible to receive disability benefits under the Company's long-term disability plan (or Social Security disability benefits at a time when the Company does not maintain a long-term disability plan or such plan is not available to you). 3. COMPENSATION (a) Each year during the Term hereof, you will be paid a base salary of $220,000 per annum ("Base Salary"), payable in accordance with the Company's payroll guidelines. Increases may be made to your Base Salary at the discretion of the Board of Directors based upon your individual performance. (b) You shall be a participant in the Company's Incentive Compensation Plan. The target bonus level for your position is $150,000 per annum. You shall receive a guaranteed bonus of at least $75,000 per annum during the three year Term. As part of NGC's incentive compensation program, you will have the opportunity to earn Additional Compensation, dependent upon NGC's financial performance and other personal strategic objectives, determined in accordance with such program. (c) Each year during the Term of this Agreement, commencing December, 1997 you will receive stock option grants, with an exercise price equal to market price on date of grant, Mr. Dan Ryser July 1, 1997 Page 4 under the NGC Corporation Amended & Restated 1991 Stock Option Plan, with a present value of the projected five year gain ("Projected Value") of at least $220,000. You recognize that the projected value is subject to the future market performance of the company stock and that there is no guarantee that the actual value of such options will achieve that value. "Projected Value" means that, at the end of five years from the date of grant, assuming an increase in market price of 15% per annum during the five years, the stock option may be exercised to obtain stock having a present value of $220,000 over the exercise price. Then options are subject to the three year vesting, forfeiture and other terms and conditions of the NGC Corporation Amended & Restated 1991 Stock Option Plan. (d) You will be entitled to participate in NGC's benefits programs for senior management executives, including, without limitation, NGC's deferred compensation plan for executives, and NGC's Alternative Benefits for Senior Executives Plan. (e) The Company will pay an additional $5,000 per year on your behalf to provide you with additional life insurance and disability coverage in excess of the death benefit or disability coverage under NGC's standard executive employee and benefit plans. You shall select such coverage and shall own the insurance policies providing such coverage. You will be responsible for coverage and effectiveness of the policies, the Company's only obligation being to pay such amounts. (f) You shall be entitled to participate in such other plans and receive such other perquisites as the Board of Directors of the Company in its sole discretion determines. 4. CONFIDENTIALITY You recognize and acknowledge that: (a) You will have access to certain information concerning the Company that is confidential and proprietary and constitutes valuable and unique property of the Company. You agree that you will not at any time, either during or after your employment, disclose to others, use, copy or permit to be copied, except pursuant to your duties on behalf of the Company or its successors, assigns or nominees, any secret or confidential information of the Company (whether or not developed by you) without the prior written consent of the Board of Directors of the Company. The term "secret or confidential information of the Company" (sometimes referred to herein as "Confidential Information") shall include, without limitation, the Company's plans, strategies, potential acquisitions, costs, prices, systems for buying, selling, and/or trading natural gas, natural gas liquids, crude oil, coal, and electricity, client lists, pricing policies, financial information, the names of and pertinent information regarding suppliers, computer programs, policy or procedure manuals, training and recruiting procedures, accounting procedures, the status and content of the Mr. Dan Ryser July 1, 1997 Page 5 Company's contracts with its suppliers or clients, or servicing methods and techniques at any time used, developed, or investigated by the Company, before or during your tenure of employment to the extent any of the foregoing are (i) not generally available to the public and (ii) maintained as confidential by the Company. You further agree to maintain in confidence any confidential information of third parties received as a result of your employment and duties with the Company. (b) At the termination of your employment you will deliver to the Company, as determined appropriate by the Company, all correspondence, memoranda, notes, records, client lists, computer systems, programs, or other documents and all copies thereof made, composed or received by you, solely or jointly with others, and which are in your possession, custody, or control at such date and which are related in any manner to the past, present, or anticipated business of the Company. (c) To protect and safeguard the Company's trade secrets and Confidential Information and also the Company's goodwill with its suppliers and clients, for a period of twenty-four months following the termination of your employment for any reason you will not, within a 50 mile radius of any location where the Company had an office at any time during the Term hereof or any location where a client or supplier of the Company (which is a material client or supplier at any time during the Term hereof) had an office at any time during the Term hereof, without the prior written consent of the Board of Directors of the Company, directly or indirectly, engage in or be interested in (as owner, partner, shareholder, employee, director, agent, consultant or otherwise), any business which is a competitor of the Company, as hereinafter defined. For purposes of this Agreement, a "competitor of the Company" is any entity, including without limitation a corporation, sole proprietorship, partnership, joint venture, syndicate, trust or any other form of organization or a parent, subsidiary or division of any of the foregoing, which, during such period or the immediately preceding fiscal year of such entity, was engaged in the development of electric power generation projects, unregulated marketing, gathering, transportation or processing of natural gas or derivatives of natural gas or other hydrocarbons or electricity. For purposes of this paragraph, the following entities shall not be deemed to be competitors of the Company: (i) a Local Distribution Company ("LDC") to the extent that any purchases or sales by such LDC are only for consumption on its system; (ii) a natural gas producer to the extent that such producer sells only its own production or production of other working interest owners in wells in which it owns an interest; (iii) a natural gas pipeline company in the jurisdictional aspects of its business, i.e., other than a nonjurisdictional marketing affiliate or production affiliate (except as to such production affiliates own production as described in clause (ii) of this Paragraph 4(c)). The terms of this Paragraph 4(c) shall not apply to your present or future investments in the securities of companies listed on a national securities exchange or traded on the over-the-counter market to the extent such investments do not exceed one percent (1%) of the total outstanding shares of such company. Mr. Dan Ryser July 1, 1997 Page 6 (d) For a period of twenty-four months after the expiration or termination of your employment for whatever reason, you shall not induce or otherwise entice any employee of the Company to leave the Company, nor shall you attempt to hire any of the Company's employees. (e) You agree that the foregoing restrictions contain reasonable limitations as to the time, geographical area, and scope of activity to be restrained and that these restrictions do not impose any greater restraint than is necessary to protect the goodwill and other legitimate business interests of the Company, including but not limited to the protection of Confidential Information. You also agree that the general public shall not be harmed by enforcement of this Paragraph 4. Should any provision in this Paragraph 4 be held unreasonably broad with respect to the restrictions as to time, geographical area, or scope of activity to be restrained, any such restriction shall be construed by limiting and reducing it to the extent necessary to render it reasonable, and as so construed, such provision shall be enforced. 5. INDEMNIFICATION If, at any time during or after the Term of this Agreement, you are made a party to, or are threatened to be made a party in, any civil, criminal or administrative action, suit or proceeding by reason of the fact that you are or were a director, officer, employee, or agent of the Company, or of any other corporation or any partnership, joint venture, trust or other enterprise for which you served as such at the request of the Company, then you shall be indemnified by the Company against expenses actually and reasonably incurred by you or imposed on you in connection with, or resulting from, the defense of such action, suit or proceeding, or in connection with, or resulting from, any appeal therein if you acted in good faith and in a manner you reasonably believed to be in or not opposed to the best interest of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe your conduct was unlawful, except with respect to matters as to which it is adjudged that you are liable to the Company or to such other corporation, partnership, joint venture, trust or other enterprise for gross negligence or willful misconduct in the performance of your duties. As used herein, the term "expenses" shall include all obligations actually and reasonably incurred by you for the payment of money, including, without limitation, attorney's fees, judgments, awards, fines, penalties and amounts paid in satisfaction of a judgment or in settlement of any such action, suit or proceeding, except amounts paid to the Company or such other corporation, partnership, joint venture, trust or other enterprise by you. 6. ARBITRATION Any controversy or claim arising out of or relating to this Agreement, or any breach thereof, shall, except as provided in Paragraph 4, be adjusted only by arbitration in accordance with the rules of the American Arbitration Association, and judgment upon such award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration shall be held in the City of Mr. Dan Ryser July 1, 1997 Page 7 Houston, Texas, or such other place as may be agreed upon at the time by the parties to the arbitration. The arbitrator(s) shall, in their award, allocate between the parties the costs of arbitration, which shall include reasonable attorneys' fees of the parties, as well as the arbitrators' fees and expenses, in such proportions as the arbitrator(s) deem just; provided however, notwithstanding the above, in the event you are the prevailing party, then the Company agrees to reimburse you for all such costs of arbitration, including but not limited to attorneys' fees and arbitrators' fees and expenses reasonably incurred by you; provided further, however, notwithstanding the above, in the event the Company is the prevailing party, then the total costs of arbitration, including but not limited to attorneys' fees reasonably incurred by the Company and arbitrators' fees and expenses, that may be allocated to you by the arbitrator(s) shall not in any event exceed Twenty-Five Thousand Dollars ($25,000). Notwithstanding the foregoing, you shall be entitled to seek specific performance in a court of competent jurisdiction of your right to be paid your full compensation until your separation from employment, during the pendency or dispute of any controversy arising under or in connection with this Agreement. 7. OTHER PROVISIONS (a) THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICTS OF LAW, RULE OR PRINCIPLE THAT MIGHT OTHERWISE REFER TO THE SUBSTANTIVE LAW OF ANOTHER JURISDICTION. (b) Except as otherwise indicated, this Agreement is not assignable without the written authorization of both parties; provided that the Company may assign this Agreement to any entity to which the Company transfers substantially all of its assets or to any entity which is a successor to the Company by reorganization, incorporation, merger or similar business combination. (c) Except as otherwise provided herein, the provisions of Paragraphs 4, 5 and 6 of this Agreement shall survive the termination of this Agreement. (d) This Agreement supersedes all previous employment agreements, written or oral, between the Company and you. This Agreement may be amended only by written amendment duly executed by both parties or their legal representatives and authorized by action of the Board. Except as otherwise specifically provided in this Agreement, no waiver by either party hereto of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a subsequent breach of such condition or provision or a waiver of a similar or dissimilar provision or condition at the same or at any prior or subsequent time. Mr. Dan Ryser July 1, 1997 Page 8 (e) Any notice or other communication required or permitted pursuant to the terms of this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States mail, first class, postage prepaid and registered with return receipt requested, addressed to the intended recipient at his or its address set forth below and, in the case of a notice or other communication to the Company, directed to the attention of the Board of Directors with a copy to the Secretary of the Company, or to such other address as the intended recipient may have theretofore furnished to the sender in writing in accordance herewith, except that until any notice of change of address is received, notices shall be sent to the following addresses: IF TO YOU: IF TO THE COMPANY: Dan Ryser NGC Corporation 4803 Big Falls 1000 Louisiana, Suite 5800 Kingwood, TX 77345 Houston, TX 77002-5050 (f) If any one or more of the provisions or parts of a provision contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision or part of a provision of this Agreement, but this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision or part of a provision had never been contained herein and such provisions or part thereof shall be reformed so that it would be valid, legal and enforceable to the maximum extent permitted by law. (g) You shall not be required to mitigate damages (or the amount of any compensation provided under this Agreement to be paid) following your termination of employment, by seeking employment or otherwise. If the foregoing reflects your understanding of the terms of your employment with the Company, please execute each copy of this letter in the space provided below. NGC CORPORATION By: _________________________________ T. M. Matthews AGREED AND ACCEPTED this ______ day of September, 1997, and effective as of July 1, 1997 ________________________________ Dan Ryser EX-10.41 7 SEVERANCE PAY PLAN EXHIBIT 10.41 DYNEGY INC. SEVERANCE PAY PLAN (EFFECTIVE SEPTEMBER 1, 1998) DYNEGY INC. SEVERANCE PAY PLAN (Effective September 1, 1998) Table of Contents Page I. INTRODUCTION......................................................... 1 II. HIGHLIGHTS........................................................... 1 III. ELIGIBILITY.......................................................... 2 A. Eligibility for Participation.................................. 2 B. Ineligibility for Participation................................ 2 1. Resignation or Discharge.................................. 2 2. Changed Decisions......................................... 3 3. Transition Assistance..................................... 3 IV. SEVERANCE PAY BENEFITS............................................... 3 A. Amount of Severance Pay........................................ 4 B. Integration With Plant Closing Law............................. 4 C. Form of Payment of Severance Pay Benefits...................... 4 D. Effect of Plan on Other Company Benefits....................... 5 E. Rehired Employees.............................................. 5 F. Deceased Employees............................................. 5 V. PLAN ADMINISTRATION.................................................. 5 A. General........................................................ 5 B. Powers of the Plan Administrator............................... 5 VI. CLAIM REVIEW PROCEDURE............................................... 6 A. Initial Claim for Benefits..................................... 6 B. Review of Claim Denial......................................... 7 C. Exhaustion of Review Remedies.................................. 7 VII. PLAN AMENDMENT OR TERMINATION........................................ 7 VIII. REORGANIZED COMPANIES AND PLAN MERGERS............................... 8 IX. ERISA RIGHTS......................................................... 8 X. GENERAL PROVISIONS................................................... 9 A. Voluntary Plan................................................. 9 B. No Rights Created or Accrued................................... 9 C. Relation of the Plan to Other Descriptive Matter............... 10 D. Non-alienation of Benefits..................................... 10 E. Governing Law.................................................. 10 i F. Plan Communications............................................ 10 G. Severability................................................... 10 H. Effect on Other Plans.......................................... 10 I. Costs and Indemnification...................................... 10 J. Miscellaneous.................................................. 11 XI. IDENTIFYING DATA..................................................... 11 A. Employer/Plan Sponsor Location................................. 11 B. Plan Administrator............................................. 11 C. Agent for Legal Service of Process............................. 11 XII. DEFINITIONS.......................................................... 11 Attachment A - Agreement and Release Attachment B - Subsidiaries/Affiliates/Adopting Dynegy Inc. Severance Pay Plan ii I. INTRODUCTION Dynegy Inc. and its participating subsidiaries and affiliated entities hereby establish the Dynegy Inc. Severance Pay Plan (defined more completely below as the "Plan") effective as of September 1, 1998, to provide severance benefits for certain Eligible Employees whose employment is terminated involuntarily by the Company/1/ under certain conditions. The Company is pleased to provide this Plan to its Employees, and wants you, as an Employee, to know about and understand it. This Plan has been prepared to let you know how it works and about how it may benefit you. You should read all parts of this Plan carefully so that you will not only understand the ways in which it may benefit you, but certain exclusions to coverage and limitations on the receipt of benefits which may apply to you. This Plan supersedes and replaces any and all Company severance pay policies, plans or other programs providing similar benefits in existence prior to September 1, 1998. As of September 1, 1998, the only Company severance benefits are those offered under this Plan and any Supplemental Plans specifically referring to this Plan that are effective after August 31, 1998. II. HIGHLIGHTS . Only Eligible Employees who satisfy all the requirements of the Plan will receive severance payments. . Severance payments will be made to Eligible Employees based on their Credited Length of Service. . Eligible Employees will receive severance pay in a lump sum, less applicable withholding for taxes and authorized benefit contributions. . Benefits from certain of the Company's benefits plans may continue if you ask the Company to withhold the cost of such benefits from your severance pay. . Severance pay benefits under the Plan are provided solely by the Company at no cost to you other than the cost of any other benefit plans under which you elect continued coverage. See Subsection IV(D) of this Plan. . As a condition to receipt of severance pay benefits under this Plan, you must execute an Agreement and Release (hereinafter called the "Release") in the form provided by the Company acknowledging receipt of the severance payment and releasing the Company from any liability arising from your employment or termination. You will also agree, by signing the Release, not to claim employment or seek employment rights from the Company. ______________________ /1/ The term "Company," as more completely defined in Section XII, shall include Dynegy Inc., and each of its subsidiaries and affiliated entities that participate in the Plan. The participating subsidiaries and affiliated entities are listed on Attachment B. III. ELIGIBILITY A. ELIGIBILITY FOR PARTICIPATION You will receive severance pay only if your employment termination meets specific guidelines. After the Effective Date, each Employee may be eligible to participate in the Plan in the event such Employee's employment is terminated by an Employing Company for one of the following reasons (determined by the Plan Administrator in its sole discretion): . Reduction in force; . Position elimination; . Office closing; . Mutually satisfactory resignation. An Employing Company or an operating unit thereof, upon written approval of the Plan Administrator, in its sole discretion, may grant participation eligibility due to an employment termination for additional reasons within the policy or guidelines of the Company and signed by the Vice President of Human Resources. If you are given advance notice of your termination, you must remain in employment until the Company's designated Termination Date in order to receive severance pay. Severance pay may be paid if you leave prior to the designated Termination Date if your leaving will not have an adverse effect on the activities of your department and is approved in writing by the Vice President of Human Resources. B. INELIGIBILITY FOR PARTICIPATION 1. RESIGNATION OR DISCHARGE An Employee is ineligible to participate in the Plan in the event the Employee's employment by an Employing Company terminates for a reason other than those enumerated in Subsection A above, including, but not limited to, the following: . terminated by an Employing Company for any reason not listed in Subsection A, above. The Plan Administrator, in its sole discretion, may determine whether a termination makes an Employee ineligible for benefits provided by this Plan; . voluntarily resign for any reason, except participation in a Company Voluntary Separation Program or a mutually satisfactory resignation as determined by the Plan Administrator, in its sole discretion; . involuntarily resign for any reason, except those reasons listed in Subsection A, above; . Employee status is canceled due to a failure to report for work, failure to report from leave, or other similar event; 2 . merger, acquisition, sale, transfer, outsourcing, reorganization or restructuring of all or part of the Employing Company or any affiliate or division thereof where either (i) you are offered another position within the Company that provides you a base salary at least equal to or greater than your base salary on the Termination Date;/2/ or (ii) you accept any position with a Successor Company, including an outside contractor, whether affiliated or unaffiliated with the Company and whether or not the Successor Company adopts the Plan; . death; . have an employment contract that contains severance provisions; . are receiving long-term disability benefits at the time you are notified that your employment is being terminated even if your termination is caused by an event listed in Subsection III (A). However, if your disability benefits cease within two years after your position is eliminated because you are no longer disabled and you seek to be reinstated but cannot be rehired due to the elimination of your position and the absence of a comparable position, the Plan Administrator or its designee may, but need not, make you eligible for severance pay by causing the notice, required by the provisions of the Plan, to be given to you; . return from a leave of absence which extends beyond the policy reinstatement period, if applicable, and no position is available. These exceptions from eligibility shall apply even if your termination otherwise qualifies under Subsection A above. 2. CHANGED DECISIONS The Company has the right to cancel or reschedule your termination before you terminate employment. You will not be eligible for severance benefits under this Plan if your termination is canceled. 3. TRANSITION ASSISTANCE You will not be entitled to benefits under this Plan unless you satisfy all transition assistance requests of the Company to the Company's satisfaction, such as aiding in the location of files, preparing accounting records, returning all Company property in your possession, or repaying any amounts you owe the Company. IV. SEVERANCE PAY BENEFITS If you are terminated as a result of an event listed in Subsection III (A) above, you will receive written notice of your employment termination from the Vice President of Human Resources. This will be your notice of potential eligibility to participate in the Plan. If you think you are eligible for benefits under the Plan and you have not received notice from the Vice ____________________ /2/ Such an offer includes any position with the Company whether or not in accepting such position you would be required to transfer to a different work location, but only so long as you have been offered the Company's standard relocation package in connection with such transfer. 3 President of Human Resources, you may send a written request for benefits addressed to the Vice President of Human Resources pursuant to Subsection VI (A), below. You will be entitled to receive benefits described in the Plan only if you execute the Release, in the form approved and distributed to Eligible Employees by the Plan Administrator within the 45 day time period after receiving the Release. By signing the Release, you will be waiving any claims which you may have against the Company arising from your employment or termination of employment. The Release should be signed only after careful consideration and consultation with a legal advisor. A. AMOUNT OF SEVERANCE PAY The amount of severance pay you receive under this Plan (not including any supplements to the Plan) will be based on your Credited Length of Service with the Company. If you become entitled to severance benefits under this Plan, you will receive two Weeks of Pay for each full, completed Year of Service with the Company and a pro-rated amount for less than a Year of Service, with a minimum of eight Weeks of Pay for Employees with less than two Years of Service on their Separation Date and twelve Weeks of Pay for Employees with two to six Years of Service on their Separation Date. The maximum amount of severance payable under the Plan equals 52 Weeks of Pay. However, if you choose not to execute the Release, you will not receive any of the Plan Benefits. The benefits payable under this Plan (and any supplements) shall be inclusive of and offset by any other severance or termination payment made by the Company, including payments provided by Subsection B below. B. INTEGRATION WITH PLANT CLOSING LAW To the extent that any federal, state or local law, including, without limitation, so-called "Plant closing" laws, requires the Company to give advance notice or make payment of any kind to an Eligible Employee because of that Employee's involuntary termination due to a layoff, reduction in force, Plant or facility closing, sale of business, change of control, or any other similar event or reason, the benefits provided under this Plan may be reduced or eliminated, in the sole discretion of the Plan Administrator. The benefits provided under this Plan are intended to satisfy any and all statutory obligations that may arise out of any Eligible Employee's involuntary termination for the foregoing reasons, and the Plan Administrator shall so construe and implement the terms of the Plan it its sole discretion. C. FORM OF PAYMENT OF SEVERANCE PAY BENEFITS Severance pay benefits will be paid to you in a lump sum as soon as administratively practicable following the expiration of the seven-day revocation period after the execution of the Release, but in NO event shall such benefits be paid earlier than your Termination Date. All Plan Benefits will be subject to withholding for applicable employment and income taxes. Plan Benefits will be paid by check and sent to your last known mailing address. You are responsible for informing the Plan Administrator, by written letter delivered within the seven-day revocation period to the Vice President of the Human Resources, of any change in your mailing address. All of the required conditions for other benefits you elect to receive (see Subsection D below) will be deducted from the lump sum. 4 D. EFFECT OF PLAN ON OTHER COMPANY BENEFITS You may be eligible to continue participation in certain other Company benefits and/or benefit plans. However, continuation in various Company plans is subject to the terms and conditions of the applicable plan, documents or insurance contracts in effect on the date of your termination. Your rights under the other plans, documents or insurance contracts are not affected by your decision to participate or to not participate in this Plan. However, no severance benefits will be payable, except as set forth by this Plan. E. REHIRED EMPLOYEES Once you receive severance pay under this Plan, you have no right to be re-employed by the Company. If you are rehired by the Company after you receive a lump sum payment of your severance pay, you will be entitled to keep that portion of your severance pay equal to your regular, normal base weekly rate of pay prior to your employment termination multiplied times the number of weeks and/or fraction of weeks between your Termination Date and the rehire date. Any remainder must be either returned to the Company upon your rehire or it will be deducted from your pay. If you are rehired within the same calendar year in which your employment was terminated because of a reduction in force and you received payment for vacation earned but not taken, you may either retain the payment and forfeit the vacation time for which you were eligible prior to your employment termination, or you may return to the Company the amount you received and reinstate vacation time for which you were eligible prior to termination. If your employment ends because of a reduction in force and you are rehired by the Company within twelve months of your Termination Date, your Years of Service with the Company prior to such termination will be counted in determining your vacation benefits eligibility in future years. Applicable vacation time on rehire will be determined in accordance with the Company's vacation policy. F. DECEASED EMPLOYEES In the event that an Eligible Employee dies after the termination of his or her employment and before having received the full amount of the severance benefits for which the Eligible Employee was qualified, Plan Benefits will be paid to the legal representative of the Employee's estate unless the Employee notifies the Plan Administrator in writing that they specifically designate a different Beneficiary. Benefits will be paid as soon as practicable after receipt of notice of proof of such death. V. PLAN ADMINISTRATION A. GENERAL The administration and operation of the Plan is directed by the Plan Administrator. 5 B. POWERS OF THE PLAN ADMINISTRATOR The Plan Administrator will have full power to administer the Plan in all of its details, subject, however, to the requirements of ERISA. For this purpose the Plan Administrator's power will include, but will not be limited to, sole discretionary power to: 1. make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan or required to comply with applicable law; 2. interpret the Plan, its interpretation thereof to be final and conclusive on any Employee, former Employee, Participant, former Participant and Beneficiary; 3. decide all questions concerning the Plan and the eligibility of any person to participate in the Plan; 4. compute the amount of benefits which will be payable to any Participant, former Participant or Beneficiary in accordance with the provisions of the Plan, and to determine the person or persons to whom such benefits will be paid; 5. authorize the payment of benefits; 6. keep such records and submit such filings, elections, applications, returns or other documents or forms as may be required under the Code and applicable regulations, or under state or local law and regulations; 7. appoint such agents, counsel, accountants and consultants as may be required to assist in administering the Plan; 8. by written instrument, allocate and delegate its fiduciary responsibilities in accordance with Section 405 of ERISA; and 9. the right to amend, terminate, supplement, or modify the Plan at any time whether or not benefits that are currently payable are affected or retroactively terminated. All such rules, regulations, determinations, constructions, decisions and interpretations made by the Plan Administrator will be final and binding, except as otherwise required by law. To the extent the Plan Administrator has been granted discretionary authority under the Plan, the Plan Administrator's prior exercise of such authority shall not obligate it to exercise its authority in a like fashion thereafter. VI. CLAIM REVIEW PROCEDURE A. INITIAL CLAIM FOR BENEFITS If your employment has been terminated under circumstances which you believe entitled you to benefits under this Plan and you have not received notification of your eligibility to participate in the Plan; if you are an Eligible Employee who received a written notification and believe an error has been made either in the determination of the amount of Plan Benefits; if you believe that the Plan is not being operated properly; if you believe that the fiduciaries of the Plan 6 have breached their duties; or you believe that your legal rights are being violated with respect to the Plan, you must file a written claim for benefits with the Plan Administrator. A formal claim must be filed within 90 days after the date you first knew or should have known of the facts on which the claim is based (usually your Termination Date), unless the Plan Administrator in writing consents otherwise. The Plan Administrator shall provide you, on request, with a copy of the claims procedures established under this Section. The Plan Administrator shall decide, in its sole discretion, whether your claim shall be allowed. If a claim for Plan Benefits under the Plan is denied by the Plan Administrator in whole or in part, the claimant will be notified within sixty (60) days of the date the claim is delivered to the Plan Administrator, or one-hundred twenty (120) days if the claimant is told of the extension, in writing, before the end of the initial sixty (60) days, specifying the reason for the extension. The claim denial will be written in understandable language and will state: (a) specific reasons for denial of the claim, (b) specific references to Plan provisions on which the denial is based, (c) a description (if appropriate) of any additional material or information necessary for the claimant to perfect the claim, and (d) notice of your right to seek a review of the denial and an explanation of the Plan's review procedure. A claim that is not acted upon within sixty (60) days may be deemed by the claimant to have been denied. B. REVIEW OF CLAIM DENIAL If your claim is denied, in whole or in part, you will have the right to request that the Plan Administrator (or its delegate), review the denial, provided you file a written request for review with the Plan Administrator within 60 days after the date on which you received written notification of the denial. You (or your duly authorized representative) may review pertinent documents and submit issues and comments in writing to the Plan Administrator. Within 60 days after a request for review is received, the review will be made and you will be advised in writing of the decision on review, unless special circumstances require an extension of time for processing the review, in which case you will be given a written notification within such initial 60-day period specifying the reasons for the extension and when such review will be completed (provided that such review will be completed within 120 days after the date on which the request for review was filed). The decision on review will be forwarded to you in writing and will include specific reasons for the decision and references to Plan provisions upon which the decision is based. If notice of the decision on review is not furnished within the periods stated above, the claim will be deemed denied. C. EXHAUSTION OF REVIEW REMEDIES You must properly file a claim for benefits, and request a review of any complete or partial denial, prior to seeking a review of your claim for benefits in a court of law. A decision on a Review of Claim Denial (see preceding paragraph) will be the final decision of the Plan Administrator. After this final decision is provided by the Plan Administrator, you may seek judicial remedies in accordance with your rights under the Employee Retirement Income Security Act of 1974 ("ERISA"). 7 VII. PLAN AMENDMENT OR TERMINATION The Plan Sponsor reserves the right to amend, modify, supplement or terminate, in whole or in part, any or all of the provisions of the Plan at any time prospectively or retroactively, for any reason, without notice or further obligation to any Employee or any other person entitled to receive benefits, if any, under the Plan. The Plan Sponsor also reserves the right to make any modification, supplementation or amendments to the Plan that are necessary or appropriate to qualify or maintain the Plan so that it satisfies the applicable provisions of the Code and the Employee Retirement Income Security Act of 1974 (ERISA). Any Plan amendment must be signed by the Vice President of Human Resources to be effective. Any Employing Company, other than the Company, may withdraw from participation in the Plan at any time by delivering to the Plan Administrator written notification to that effect signed by such Employing Company's chief executive officer or his/her delegate. Withdrawal by any Employing Company pursuant to this paragraph or complete discontinuance of severance benefits under the Plan by any Employing Company other than the Company, shall constitute termination of the Plan with respect to such Employing Company. In the event any Employing Company withdraws from participation or the Plan Supervisor terminates the Plan, no affected Employee shall be entitled to receive benefits hereunder for Employment either before or after such action. VIII. REORGANIZED COMPANIES AND PLAN MERGERS Any corporation that succeeds to the business and assets of the Company or any part of its operations may, by appropriate resolution, adopt the Plan and shall thereupon succeed to such rights and assume such obligations hereunder as the Company and said corporation shall have agreed upon in writing. Any corporation that succeeds to the business of any Employing Company other than the Company, or any part of the operations of such Employing Company may, by appropriate resolution, adopt the Plan and shall thereupon succeed to such rights and assume such obligations hereunder as such Employing Company and said corporation shall have agreed upon in writing; provided, however, that such adoption and the terms thereof agreed upon in writing have been approved by the Company. IX. ERISA RIGHTS As a Participant in this Plan, you are entitled to certain rights and protections under federal law. ERISA provides that all Plan Participants shall be entitled to: a) Examine, without charge, at the Plan Administrator's office and at other specified locations, such as work sites, all Plan documents including contracts, and copies of all documents filed by the Plan Sponsor with the U.S. Department of Labor, such as detailed annual reports and Plan descriptions. b) Obtain a copy of all Plan documents and other Plan information upon written request to the Plan Administrator. The administrator may make a reasonable charge for the copies. c) Receive a summary of the Plan's annual financial report. The Plan Administrator is required by law to furnish each Participant with a copy of this summary annual report. 8 In addition to creating rights for Plan Participants, ERISA imposes duties upon the people who are responsible for the operation of the employee benefit plan. The people who operate your Plan, called "fiduciaries" of the Plan, have a duty to do so prudently and in the interest of you and other Plan Participants and beneficiaries. No one, including your Employer, your union, or any other person may fire you or otherwise discriminate against you in any way to prevent you from obtaining a welfare benefit or exercising your rights under ERISA, in whole or in part. If a claim for benefits is denied in whole or in part, you must receive a written explanation of the reason for the denial of a benefit claim. You have a right to have the Plan Administrator review and reconsider your claim. Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the Plan and do not receive them within 30 days, you may file suit in a federal court. In such case, the court may require the Plan to provide the materials and pay you up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan Administrator. If you have a claim for benefits which is denied or ignored in whole or in part, you may file suit in a state or federal court having proper jurisdiction. If it should happen that Plan Fiduciaries misuse the Plan's money or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in federal court. The court will decide who should pay for the court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay the costs and fees (e.g., if it finds your claim is frivolous). If you have any questions about this statement or about your rights under ERISA, you should contact the area office of the U.S. Labor-Management Services Administration, Department of Labor. If you have any questions about the Plan, you should contact the Plan Administrator. X. GENERAL PROVISIONS A. VOLUNTARY PLAN The adoption of the Dynegy Inc. Severance Pay Plan is purely voluntary on the part of the Company and shall not be deemed to constitute a contract between the Company, any Employee or other person not in the employ of the Company, or to be a consideration for, or an inducement or condition of, the employment of any Employee or other person, or to give any right to be retained in the employ of the Company, or to interfere with the right of an Employee to quit at any time, or to interfere with the right of the Company to discharge any Employee or other person at any time. B. NO RIGHTS CREATED OR ACCRUED Nothing in the Plan shall be construed as giving to an Employee of the Company a right to receive any benefit other than the benefits specifically provided under the terms of the Plan. Nothing in the Plan shall be construed to limit in any manner the right of the Company to discharge, demote, downgrade, transfer, relocate, or in any other manner treat or deal with any person in its employ, without regard to the effect such treatment or dealing may have upon such person as someone who might otherwise have become (or remained) a Participant in the Plan, which right is hereby reserved. No benefits shall be deemed to accrue under the Plan at any time 9 except the time at which they become payable under the Plan, and no right to a benefit under the Plan shall be deemed to vest prior to your Termination Date. C. RELATION OF THE PLAN TO OTHER DESCRIPTIVE MATTER The Plan shall contain no terms or provisions except those set forth herein, or as hereafter amended in accordance with the provisions of section VII of this Plan. If any description made in any other document is deemed to be in conflict with any provision of the Plan, the provisions of the Plan shall control. D. NON-ALIENATION OF BENEFITS No benefits payable under the Severance Pay Plan shall be subject to anticipation, alienation, sale, transfer, assignment, pledge or other encumbrance, and any attempt to do so shall be void. E. GOVERNING LAW The provisions of the Severance Pay Plan shall be construed, administered and enforced according to the Employee Retirement Income Security Act of 1974 ("ERISA") and, to the extent not preempted, by the laws of the State of Texas. F. PLAN COMMUNICATIONS No communications in connection with the Plan made by you are effective unless duly executed on an appropriate form provided or approved by, and filed with, the Plan Administrator. G. SEVERABILITY If any provision of the Severance Pay Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions of the Plan, and the Plan shall be construed and enforced as if such illegal and invalid provisions had never been set forth in the Plan. Should the Release be held invalid, Employee shall return all monies given to him or her under this Plan in consideration for the execution of the Release. H. EFFECT ON OTHER PLANS This Plan has no effect on the rights of any Participant under any other employee benefit plan sponsored by the Company (other than as replaced or superceded in Section I hereof) such as any profit-sharing, medical, dental or hospitalization, life insurance, AD&D, incentive compensation, or vacation pay plan. Rights under those plans are governed solely by their terms, and you should review those plans to ascertain their rights under them. In particular, your severance benefits under this Plan do not change the date of your termination of employment for purposes of any other plan. I. COSTS AND INDEMNIFICATION All costs of administering the Plan and providing Plan Benefits will be paid by the Company, with one exception: any expenses (other than arbitrator fees) incurred in resolving 10 disputes with multiple Claimants concerning their entitlement to the same benefit may be charged against the benefit, which will be reduced accordingly. To the extent permitted by applicable law and in addition to any other indemnities or insurance provided by the Company, the Company shall indemnify and hold harmless its (and its affiliates') current and former officers, directors, and employees against all expenses, liabilities, and claims (including legal fees incurred to defend against liabilities and claims) arising out of their discharge or omission in good faith of their administrative and fiduciary responsibilities with respect to the Plan. Expenses and liabilities arising out of willful misconduct will not be covered under this indemnity. J. MISCELLANEOUS Where the context so indicates, the singular will include the plural and vice versa. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. Unless the context clearly indicates to the contrary, a reference to a statute or document shall be construed as referring to any subsequently enacted, adopted, or executed counterpart. XI. IDENTIFYING DATA The Severance Pay Plan is a welfare benefit plan providing benefits from the general assets of the Company. Dynegy Inc. is the Plan Sponsor. The Plan Year is from January 1 to the following December 31. For identification purposes, the Plan Sponsor has assigned to the Plan number 504. The Employer identification number for Dynegy Inc. is 94-3248415. A. EMPLOYER/PLAN SPONSOR LOCATION Dynegy Inc. 1000 Louisiana Street, Suite 5800 Houston, Texas 77002 B. PLAN ADMINISTRATOR Plan Administrator Dynegy Inc. Severance Pay Plan c/o Vice President of Human Resources for Dynegy Inc. 1000 Louisiana Street, Suite 5800 Houston, Texas 77002 C. AGENT FOR LEGAL SERVICE OF PROCESS Plan Administrator Dynegy Inc. Severance Pay Plan c/o Vice President of Human Resources for Dynegy Inc. 1000 Louisiana Street, Suite 5800 Houston, Texas 77002 (713) 507-6400 11 XII. DEFINITIONS The following words and phrases are used quite frequently in this Severance Pay Plan and have special meanings of which you should take note. a) A Beneficiary is a person or persons entitled to receive benefits under the Plan upon the death of a Participant. b) The Code means the Internal Revenue Code of 1986, as amended. c) The Company is Dynegy Inc., its successors and assigns, and all Employing Companies, including all of Dynegy Inc.'s subsidiaries and affiliated entities currently participating in the Plan which are listed on Attachment B. d) Contract Employees means persons whom the Company regards as Contract Employees. Contract Employees are not eligible to participate in this Severance Pay Plan. e) Contractor's Employees means persons working for a company providing goods or services (including temporary employee services) to the Company whom the Company does not regard to be its common law employees, as evidenced by the Company's failure to withhold taxes from their compensation, even if the persons really are the Company's common law employees. Contractor's Employees are not eligible to participate in this Severance Pay Plan. f) Credited Length of Service means each Year of Service as an Employee with an Employing Company, an Affiliated Company or a Predecessor Company for which you are given credit by the Plan Administrator. g) The Effective Date for purposes of this Plan is September 1, 1998. h) An Eligible Employee means an Employee who meets the eligibility requirements set forth in Section III of this Plan. i) An Employee is any full-time and active Employee employed by the Company who is paid through the payroll department of the Company or the Employing Company. Temporary or Part-time Employees, Foreign Employees, Independent Contractors, Contract Employees, Contractors' Employees and Leased Employees are not "Employees" under the Plan. Employees covered by a collective bargaining agreement are not "Employees" unless an agreement has been negotiated with the bargaining representative for coverage under the Plan. j) The Employer or Employing Company means the Employee's direct employer, including Dynegy Inc. and such other of the subsidiaries and affiliated companies of Dynegy as have adopted the Plan and have been admitted to participation by the Plan Administrator. k) ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations issued thereunder. 12 l) Foreign Employees means any persons who are not on a U.S. payroll of the Company. Foreign Employees are not eligible to participate in this Severance Pay Plan. m) Full-time means any Employee who is regularly scheduled to work 40 or more hours per week. n) Leased Employees means persons who are the Company's leased employees, within the meaning of Code Section 414(n). Leased Employees are not eligible to participate in this Severance Pay Plan. o) The Named Fiduciary for the Plan is the Plan Administrator. p) Participants are the Eligible Employees of the Company who elect to, and do, participate in the Severance Pay Plan and who meet the eligibility requirements set forth under section III of this Plan. q) Part-Time Employees are the employees of the Company who are regularly scheduled to work less than 40 hours per week. Part-Time Employees are not eligible to participate in this Severance Pay Plan. r) The Plan is the Dynegy Inc. Severance Pay Plan described in this document including any Supplemental Plans during the period of time that they are effective. s) The Plan Administrator is the person or persons appointed by the Compensation and Human Resources Committee (or their delegates) to oversee the operation of the Plan. t) Plan Benefit means amounts payable under the Plan to a Participant under the conditions described in Section IV. u) The Plan Sponsor is Dynegy Inc. v) The Plan Year is the 12-month period ending on December 31, 1998. w) Release means the Agreement and Release set forth as Attachment A, or such other form designated by the Plan Administrator. x) Separation or Termination Date means an Employee's last day of active service for the Employer, as designated by the Employer. y) A Successor Company is any entity that assumes operations or functions formerly carried out by the Company (such as the buyer of a facility, asset or division or any entity to which a Company operation or function has been outsourced); any affiliate of the Company; or any entity making the job offer at the request of the Company (such as a joint venture of which the Company or an affiliate is a member). z) Supplemental Plans mean plans designated as supplements to this Plan that are signed by the Vice President of Human Resources and are first effective on or after September 1, 1998. 13 aa) Vice President of Human Resources means the individual currently holding the title Vice President of Human Resources for Dynegy Inc., or his/her designee. bb) Voluntary Separation Program means a program designated as a Voluntary Separation Program by the Company and signed by the Vice President of Human Resources. cc) A Week of Pay means your base weekly rate of pay, excluding overtime, bonuses, commissions (except in the case of truck drivers employed by Dynegy Crude Gathering Services, Inc., whose base pay is comprised solely of commissions), premium pay, shift differentials, employee benefits, expense reimbursements, and similar amounts. However, the fact that amounts are withheld from your pay for taxes, employee benefits, or other reasons will be disregarded in calculating your Week of Pay amount. If you are paid by the hour, your base weekly rate of pay is your regular hourly rate multiplied by your scheduled hours per week. (e.g., forty (40) hours per week for full time Employees). Your base weekly rate of pay shall be determined by the Plan Administrator in its sole discretion. dd) Year of Service means each continuous year (365 days) of service with the Company without a break in service. Effective: September 1, 1998 ---------------------------- Michael B. Barton Vice President of Human Resources Dynegy Inc. 14 ATTACHMENT A DYNEGY INC. SEVERANCE PAY PLAN AGREEMENT AND RELEASE --------------------- I, ______________________ ("Employee"), hereby agree to participate in the Dynegy Inc. Severance Pay Plan (the "Plan") in accordance with its terms. A copy of the Plan has been provided to me. I understand that in order to receive severance payments under the terms of the Plan, I must sign this Agreement and Release ("Release") and return it to the Vice President of Human Resources, Dynegy Inc., 1000 Louisiana Street, Suite 5800, Houston, Texas 77002, no later than __________________________, 1998. I understand that I have been given forty-five (45) days to consider this Release. I have been advised to consult an attorney before I signed this Release. I understand that I will have seven (7) days after I sign and return this Release to the Vice President of Human Resources to change my mind and revoke this Release. I further understand that this Release will not become effective or enforceable until after that date. RELEASE ------- In consideration for the benefits provided under the Plan, and by signing this Release, I understand that I am knowingly, irrevocably, and voluntarily agreeing for myself and for my heirs, executors and assigns, to a full and complete release of Dynegy Inc., its predecessors, successors, subsidiaries, operating units, affiliates, divisions and the agents, representatives, officers, directors, shareholders, employees and attorneys and each of the foregoing (individually and collectively called the "Company" or "Employer"), from all claims, debts, liabilities, demands, obligations, promises, acts, agreements, costs, expenses, damages, actions and causes of action, whether in law or in equity, whether known or unknown, suspected or unsuspected, arising from my employment and termination of employment with Employer, including but not limited to, any and all claims pursuant to Title VII of the Civil Rights Act of 1964, 42 U.S.C. (S)2000e, et seq., as amended by the Civil Rights Act of 1991, which prohibits discrimination in employment based on race, color, national origin, religion or sex; the Civil Rights act of 1966, 42 U.S.C. (S)(S)1981, 1983 and 1985, which prohibits violations of civil rights; the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. (S)621, et seq., which protects certain employee benefits; the Americans with Disabilities Act of 1990, as amended, 42 U.S.C. (S)12101, et seq., which prohibits discrimination against the disabled; the Age Discrimination in Employment Act of 1967, 29 U.S.C. (S)621, et seq., as amended by the Older Workers Benefit Protection Act of 1990 (the "ADEA"); the Family and Medical Leave Act of 1993, 29 U.S.C. (S)2601, et seq., which provides medical and family leave; the Fair Labor Standards Act, 42 U.S.C. (S)201, et seq., including the Wage and Hour Law relating to payment of wages; the Worker Adjustment and Retraining Notification Act, and all other federal, state or local laws or regulations. This Release also includes, but is not limited to, a release of any claims for breach of contract, mental pain, suffering and anguish, emotional upset, impairment of economic opportunities, unlawful interference with employment rights, defamation, intentional or negligent infliction of emotional distress, fraud, wrongful termination, wrongful discharge in violation of public policy, breach of any express or implied covenant of good faith and fair dealing, that Employer has dealt with me unfairly or in bad faith, overtime pay, vacation pay, punitive damages, back-pay, reinstatement, front-pay, liquidated damages, injunctive relief, costs or attorneys' fees, based on or arising out of Employee's employment by Dynegy and/or his/her termination therefrom, and all other common law contract and tort claims. I am not waiving any rights or claims that may arise under the ADEA after this Agreement and Release is signed by me. THE PRECEDING PARAGRAPH MEANS THAT BY SIGING THIS RELEASE, YOU WILL HAVE WAIVED ANY RIGHT YOU MAY HAVE TO BRING A LAWSUIT OR MAKE ANY LEGAL CLAIM AGAINST THE COMPANY BASED ON ANY ACTIONS TAKEN BY THE COMPANY UP TO THE DATE OF THE SIGNING OF THIS RELEASE. WAIVER OF REINSTATEMENT ----------------------- I forever waive and relinquish any right or claim to reinstatement of employment with Employer following my termination, and acknowledge that Employer has no obligation to rehire and return me to active duty at any time in the future. ACKNOWLEDGEMENTS ---------------- 1. I have been advised by the Employer to consult with an attorney before executing this Agreement and Release. 2. I have carefully read the contents of this Release, and I understand the contents of the Release. I am executing this Release voluntarily, knowingly, and without any duress or coercion. 3. I have been extended a period of 45 days within which to consider this Release and this has afforded me ample opportunity to consult with personal, financial, and legal advisors prior to executing this Release. In the event that I decide to execute this Release prior to the end of the 45 day time period, I certify that, in accordance with 29 CFR Part 1625.22(e)(6), my decision to accept such shortening of time is knowing and voluntary and is not induced by the Company through fraud, misrepresentation, a threat to withdraw or alter to offer prior to the expiration of the 45 day time period, or by providing different terms to other employees who sign the release prior to the expiration of such time period. Should I sign this Release before the expiration of the 45 day time period, the Company may expedite the processing of the severance benefits provided in exchange for this Release. 4. I understand that for a period of seven (7) days following my execution of this Release, I may revoke the Release by notifying the Plan Administrator in care of the Vice President of Human Resources, Dynegy Inc., 1000 Louisiana, Suite 5800, Houston, Texas 77002, in writing, of my desire to do so. I understand that after the seven (7) day period has elapsed, this Release shall become effective and enforceable. I understand that no payment will be made under this Release until after the seven-day period has elapsed. 5. I acknowledge that the benefits and payments provided to me under the Plan is consideration to which I am not otherwise entitled under any Employer plan, program, or prior agreement. 6. I agree that the benefits and payments paid under the Plan shall constitute the entire amount of monetary consideration provided to me under this Release, that I am not entitled to this consideration if I do not sign this Release and that I will not seek any further compensation for any other claimed damages, costs or attorneys' fees in connection with my employment with the Company, the separation of my employment, or any other matters encompassed by this Release. 7. Any payment received pursuant to the Plans is subject to applicable employment and income taxes. Employee acknowledges and agrees that the Company has made no representations regarding the tax consequences of any amounts received by Employee, and agrees to indemnify the Company for any amounts that may be deemed subject to withholding tax which were not withheld from these amounts. 8. I have been provided statistical and other information attached hereto as Exhibit A relating to the Plan. Exhibit A contains a detailed list of the job titles and ages of all employees eligible for the Plan and the ages of all employees of the Company in the same job classifications or organizational unit who are not eligible or selected. This information has been considered by me and my advisors in reaching the decision to sign this Release. 9. I understand and acknowledge that as an employee of the Company and its predecessors, I have had access to valuable trade secrets and confidential and proprietary information of the Company. I agree to maintain the confidentiality of any trade secret or proprietary information acquired by me during my employment. I further acknowledge that if I fail to maintain the confidentiality of the information, the Company reserves the right to pursue all legal and/or equitable remedies available to it. GENERAL PROVISIONS ------------------ 1. This Release sets forth the entire agreement between the parties hereto and supersedes any and all prior agreements or understandings, written or oral, between the parties hereto pertaining to the subject matter of this Release. This Release expresses the full terms upon which Employer and the Employee conclude the employment relationship. There are no other representations or terms relating to the Employee employment relationship or the conclusion of that relationship other than those set forth in writing in this Release. I hereby represent and acknowledge that in executing this Release, I do not rely and have not relied upon any representations or statements made by any of the parties, agents, attorneys, employees, or representatives with regard to the subject matter, basis or effect of this Release or otherwise, other than as specifically stated in this written Release. 2. In the event that any provision of this Release should be held to be void, voidable, or unenforceable, the remaining portions shall remain in full force and effect. Should the Release be held invalid, I understand that I shall return the monies given to me under the Plan in consideration for the execution of this Release. 3. This Release shall be construed and enforced according to ERISA and, to the extent not preempted, by the laws of the State of Texas. 4. Employee hereby submits to the personal jurisdiction of, and venue in, the federal and state courts in the City of Houston, State of Texas for any actions arising out of or relating to this Release. 5. I have carefully read, fully understand, and agree to be bound by all of the provisions of this Release and the Plan. _____________________ ___________________________________ Date Employee Signature ATTACHMENT B SUBSIDIARIES/AFFILIATES/ADOPTING DYNEGY INC. SEVERANCE PAY PLAN 1. Dynegy Midstream Services, Limited Partnership; 2. Dynegy Midstream, Inc.; 3. Dynegy LPG Services, Inc.; 4. Dynegy Marketing and Trade; 5. Dynegy Energy Resources, Limited Partnership; 6. Dynegy Crude Gathering Services, Inc.; and 7. Dynegy Power Corp. EX-10.42 8 NGC PROFIT SHARING/401(K) SAVINGS PLAN EXHIBIT 10.42 NGC PROFIT SHARING/401(k) SAVINGS PLAN As Amended and Restated Effective January 1, 1998 NGC PROFIT SHARING/401(k) SAVINGS PLAN THIS AGREEMENT AND DECLARATION OF TRUST is by and between NGC CORPORATION, a Delaware corporation, hereinafter referred to as the "COMPANY," and CG TRUST COMPANY, a trust company organized under the laws of the State of Illinois with its principal office and place of business in the city of Chicago, Illinois, hereinafter referred to as "TRUSTEE." W I T N E S S E T H : WHEREAS, the Company has heretofore adopted the NGC PROFIT SHARING/401(k) SAVINGS PLAN, hereinafter referred to as the "PLAN," for the benefit of its employees; and WHEREAS, the Company has heretofore entered into a trust agreement with the Trustee establishing a trust to hold and invest contributions made under the Plan and from which benefits have been distributed under the Plan; WHEREAS, the Company desires to restate the Plan and to amend the Plan in several respects, intending thereby to provide an uninterrupted and continuing program of benefits and to incorporate the trust agreement into the Plan document; NOW THEREFORE, the Plan and the trust agreement are hereby restated in their entirety as follows with no interruption in time, effective as of January 1, 1998, except as otherwise indicated herein: (i) TABLE OF CONTENTS ----------------- PAGE ---- ARTICLE I DEFINITIONS AND CONSTRUCTION....................... I-1 ARTICLE II PARTICIPATION...................................... II-1 ARTICLE III CONTRIBUTIONS...................................... III-1 ARTICLE IV ALLOCATIONS AND LIMITATIONS........................ IV-1 ARTICLE V INVESTMENT FUNDS................................... V-1 ARTICLE VI RETIREMENT BENEFITS................................ VI-1 ARTICLE VII DISABILITY BENEFITS................................ VII-1 ARTICLE VIII SEVERANCE BENEFITS AND DETERMINATION OF VESTED INTEREST................................. VIII-1 ARTICLE IX DEATH BENEFITS..................................... IX-1 ARTICLE X TIME AND FORM OF PAYMENT OF BENEFITS............... X-1 ARTICLE XI IN-SERVICE WITHDRAWALS............................. XI-1 ARTICLE XII LOANS.............................................. XII-1 ARTICLE XIII ADMINISTRATION OF THE PLAN......................... XIII-1 ARTICLE XIV TRUSTEE AND ADMINISTRATION OF TRUST FUND........... XIV-1 ARTICLE XV FIDUCIARY PROVISIONS............................... XV-1 ARTICLE XVI AMENDMENTS......................................... XVI-1 ARTICLE XVII DISCONTINUANCE OF CONTRIBUTIONS, TERMINATION, PARTIAL TERMINATION, AND MERGER OR CONSOLIDATION........................ XVII-1 ARTICLE XVIII PARTICIPATING EMPLOYERS............................ XVIII-1 ARTICLE XIX MISCELLANEOUS PROVISIONS........................... XIX-1 ARTICLE XX TOP-HEAVY STATUS................................... XX-1 (ii) I. Definitions and Construction I.1 Definitions. Where the following words and phrases appear in the Plan, they shall have the respective meanings set forth below, unless their context clearly indicates to the contrary. (1) Account(s): A Member's After-Tax Account, Before-Tax Account, Dow ESOP Account, Dow Transfer Account, Employer Contribution Account, and/or Rollover Contribution Account, including the amounts credited thereto and any subaccounts thereof. (2) Act: The Employee Retirement Income Security Act of 1974, as amended. (3) After-Tax Account: An individual account for each Member which is credited with the balance, if any, of such Member's Prior Employee (Post-Tax) Contribution Account as of December 31, 1997, and which is credited with (or debited for) such account's allocation of net income (or net loss) and changes in value of the Trust Fund. (4) Annuity Starting Date: With respect to each Member or beneficiary, the first day of the first period for which an amount is payable to the Member or beneficiary from the Trust Fund as an annuity or in any other form. (5) Before-Tax Account: An individual account for each Member, which (A) is credited with (i) the balance in such Member's Elective Deferral Contributions Account (also known as the Pre-tax Contributions Account) under the Plan as of December 31, 1997, and (ii) the Before-Tax Contributions made by the Employer on such Member's behalf and the Employer Safe Harbor Contributions, if any, made on such Member's behalf pursuant to Section 3.5 to satisfy the restrictions set forth in Section 3.1(e), and (B) is credited with (or debited for) such account's allocation of net income (or net loss) and changes in value of the Trust Fund. (6) Before-Tax Contributions: Contributions made to the Plan by the Employer on a Member's behalf in accordance with the Member's elections to defer Compensation under the Plan's qualified cash or deferred arrangement as described in Section 3.1. (7) Code: The Internal Revenue Code of 1986, as amended. I-1 (8) Committee: The NGC Corporation Retirement/Benefit Plans Committee. (9) Company: NGC Corporation. (10) Company Stock: The common stock of NGC Corporation. (11) Company Stock Fund: The Investment Fund established to invest primarily in Company Stock. (12) Compensation: The regular or base salary or wages (but excluding overtime payments and bonuses) paid by the Employer to or for the benefit of a Member for services rendered or labor performed for the Employer while a Member and an Eligible Employee, subject to the following adjustments and limitations: (A) The following shall be included: (i) elective contributions made on a Member's behalf by the Employer that are not includable in income under section 125, section 402(e)(3), section 402(h), or section 403(b) of the Code; (ii) compensation deferred under an eligible deferred compensation plan within the meaning of section 457(b) of the Code; and (iii) employee contributions described in section 414(h) of the Code that are picked up by the employing unit and are treated as employer contributions. (B) The Compensation of any Member taken into account for purposes of the Plan shall be limited to $150,000 for any Plan Year with such limitation to be: (i) adjusted automatically to reflect any amendments to section 401(a)(17) of the Code and any cost-of-living increases authorized by section 401(a)(17) of the Code; and (ii) prorated for a Plan Year of less than twelve months and to the extent otherwise required by applicable law. (13) Controlled Entity: Each corporation that is a member of a controlled group of corporations, within the meaning of section 1563(a) (determined without regard to sections 1563(a)(4) and 1563(e)(3)(C)) of the Code, of which the Employer is a member, each trade or business (whether or not incorporated) with which the Employer is under common control, and each member of an affiliated service group, within the meaning of section 414(m) of the Code, of which the Employer is a member. (14) Destec Account(s): A Member's Destec Before-Tax Account, Destec After-Tax Account, Destec Employer Contribution Account, and/or Destec Rollover Contribution Account, I-2 including the amounts credited thereto. In addition to other provisions of the Plan, a Member's Destec Account(s) shall be subject to the provisions of Appendix B, and in the event of any conflict, Appendix B shall control. (15) Destec After-Tax Account: A subaccount of the After-Tax Account which is credited with the amount, if any, transferred from a Member's After-Tax Account under the Destec Plan and which is credited with (or debited for) such account's allocation of net income (or net loss) and changes in value of the Trust Fund. (16) Destec Before-Tax Account: A subaccount of the Before-Tax Account which is credited with the amount, if any, transferred from a Member's Before-Tax Contributions Account under the Destec Plan and which is credited with (or debited for) such account's allocation of net income (or net loss) and changes in value of the Trust Fund. (17) Destec Employer Contribution Account: A subaccount of the Employer Contribution Account which is credited with the amount, if any, transferred from a Member's Employer Contribution Account under the Destec Plan and which is credited with (or debited for) such account's allocation of net income (or net loss) and changes in value of the Trust Fund. (18) Destec Plan: The Destec Energy, Inc. Retirement and Savings Plan. (19) Destec Rollover Contribution Account: A subaccount of the Rollover Contribution Account which is credited with the amount, if any, transferred from a Member's Rollover Account under the Destec Plan and which is credited with (or debited for) such account's allocation of net income (or net loss) and changes in value of the Trust Fund. (20) Direct Rollover: A payment by the Plan to an Eligible Retirement Plan designated by a Distributee. (21) Directors: The Board of Directors of the Company. (22) Distributee: Each (A) Member entitled to an Eligible Rollover Distribution, (B) Member's surviving spouse with respect to the interest of such surviving spouse in an Eligible Rollover Distribution, and (C) former spouse of a Member who is an alternate payee under a qualified domestic relations order, as defined in section 414(p) of the Code, with regard to the interest of such former spouse in an Eligible Rollover Distribution. (23) Dow ESOP Account: An individual account for each Member which is credited with the amount, if any, transferred from the Member's Dow ESOP Account under the Destec Plan and which is credited with (or debited for) such account's allocation of net income (or net loss) and changes in value of the Trust Fund. In addition to other provisions of the Plan, a Member's Dow ESOP Account shall be subject to the provisions of Appendix C and, in the event of any conflict, Appendix C shall control. I-3 (24) Dow Stock: The common stock of The Dow Chemical Company, or any successor thereto. (25) Dow Transfer Account: An individual account for each Member which is credited with the sum of (A) the amount, if any, transferred from the Member's Dow Transfer Account under the Destec Plan and, (B) amounts, if any, transferred from the Member's Dow ESOP Account pursuant to Appendix C, and which is credited with (or debited for) such account's allocation of net income (or net loss) and changes in value of the Trust Fund. In addition to the other provisions of the Plan, a Member's Dow Transfer Account shall be subject to the provisions of Appendix C and, in the event of any conflict, Appendix C shall control. (26) Effective Date: January 1, 1998, as to this restatement of the Plan, except (A) as otherwise indicated in specific provisions of the Plan, (B) that provisions of the Plan required to have an earlier effective date by applicable statute and/or regulation shall be effective as of the required effective date in such statute and/or regulation, and (C) that provisions hereof affecting the duties of the Trustee shall be effective as of the date of execution of this restatement of the Plan by the Trustee. The original effective date of the Plan was May 1, 1989. (27) Eligible Employee: Each Employee other than (A) an Employee whose terms and conditions of employment are governed by a collective bargaining agreement, unless such agreement provides for his coverage under the Plan, (B) a nonresident alien, and (C) an Employee who is a Leased Employee or who is designated, compensated, or otherwise classified by the Employer as a Leased Employee. Notwithstanding any provision of the Plan to the contrary, no individual who is designated, compensated, or otherwise classified or treated by the Employer as an independent contractor shall be eligible to become a Member of the Plan. (28) Eligible Retirement Plan: (A) With respect to a Distributee other than a surviving spouse, an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code, or a qualified plan described in section 401(a) of the Code, which under its provisions and applicable law may accept such Distributee's Eligible Rollover Distribution and (B) with respect to a Distributee who is a surviving spouse, an individual retirement account described in section 408(a) of the Code or an individual retirement annuity described in section 408(b) of the Code. (29) Eligible Rollover Distribution: Any distribution of all or any portion of the Accounts of a Distributee other than (A) a distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated beneficiary or for a specified period of ten years or more, (B) a distribution to the extent such distribution is required under section 401(a)(9) of the Code, (C) the portion of a distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities), (D) a loan treated as a distribution under section 72(p) of the Code and not excepted by I-4 section 72(p)(2), (E) a loan in default that is a deemed distribution, (F) any corrective distribution provided in Sections 3.8 and 4.5(b), and (G) any other distribution so designated by the Internal Revenue Service in revenue rulings, notices, and other guidance of general applicability. (30) Eligible Surviving Spouse: (A) In the case of a Member who is living on his Annuity Starting Date, the spouse to whom a deceased Member was married on his Annuity Starting Date and (B) in the case of a Member who dies before his Annuity Starting Date, the spouse to whom a deceased Member was married on the date of his death. (31) Employee: Each (A) individual employed by the Employer and (B) Leased Employee. (32) Employer: The Company, Destec Energy, Inc., Warren NGL, Inc., Warren Energy, Inc., LPG Services Group, Inc., NGC Oil Trading and Transportation, Inc., Natural Gas Clearinghouse, Inc., Warren Petroleum, and each entity that has been designated to participate in the Plan pursuant to the provisions of Article XVIII. (33) Employer Contribution Account: An individual account for each Member, which is credited with balance, if any, of the sum of (A) as of December 31, 1997, the balances in the Matching Contribution Account and the Nonelective Contributions Account (also known as the Profit Sharing/Discretionary Contribution Account), (B) the Employer Matching Contributions made on such Member's behalf pursuant to Section 3.2, (C) the Employer Profit Sharing Contributions made on such Member's behalf pursuant to Section 3.3, (D) the Employer Discretionary Contributions, if any, made on such Member's behalf pursuant to Section 3.4, and (E) the Employer Safe Harbor Contributions, if any, made on such Member's behalf pursuant to Section 3.5 to satisfy the restrictions set forth in Section 3.6 and which is credited with (or debited for) such account's allocation of net income (or net loss) and changes in value of the Trust Fund. (34) Employer Contribution Account Subject to Vesting. The portion of a Member's Employer Contribution Account which is subject to the vesting schedule set forth in Section 8.3(e). (35) Employer Contributions: The total of Employer Matching Contributions, Employer Discretionary Contributions, Employer Profit Sharing Contributions, and Employer Safe Harbor Contributions. (36) Employer Discretionary Contributions: Contributions made to the Plan by the Employer pursuant to Section 3.4. (37) Employer Matching Contributions: Contributions made to the Plan by the Employer pursuant to Section 3.2. (38) Employer Profit Sharing Contributions: Contributions made to the Plan by the Employer pursuant to Section 3.3. I-5 (39) Employer Safe Harbor Contributions: Contributions made to the Plan by the Employer pursuant to Section 3.5. (40) Employment Commencement Date: The date on which an individual first performs an Hour of Service. (41) Highly Compensated Employee: Each Employee who performs services during the Plan Year for which the determination of who is highly compensated is being made (the "Determination Year") and who: (A) is a five-percent owner of the Employer (within the meaning of section 416(i)(1)(A)(iii) of the Code) at any time during the Determination Year or the twelve-month period immediately preceding the Determination Year (the "Look-Back Year"); or (B) For the Look-Back Year (i) receives compensation (within the meaning of section 414(q)(4) of the Code; "compensation" for purposes of this Paragraph) in excess of $80,000 (with such amount to be adjusted automatically to reflect any cost-of-living adjust-adjustments authorized by section 414(q)(1) of the Code) during the Look-Back Year; and (ii) if the Committee elects the application of this clause in such Look-Back Year, is a member of the top 20% of Employees for the Look-Back Year (other than Employees described in section 414(q)(5) of the Code) ranked on the basis of compensation received during the year. For purposes of the preceding sentence, (i) all employers aggregated with the Employer under section 414(b), (c), (m), or (o) of the Code shall be treated as a single employer, (ii) a former Employee who had a separation year (generally, the Determination Year such Employee separates from service) prior to the Determination Year and who was an active Highly Compensated Employee for either such separation year or any Determination Year ending on or after such Employee's fifty-fifth birthday shall be deemed to be a Highly Compensated Employee, and (iii) the Committee may elect, in accordance with the provisions of applicable Treasury regulations, rulings and notices, to make the Look-Back Year calculation for a Determination Year on the basis of the calendar year ending with or within the applicable Determination Year (or, in the case of a Determination Year that is shorter than twelve months, the calendar year ending with or within the twelve-month period ending with the end of the applicable Determination Year). To the extent that the provisions of this Paragraph are inconsistent or conflict with the definition of a "highly compensated employee" set forth in section 414(q) of the Code and the Treasury regulations thereunder, the relevant terms and provisions of section 414(q) of the Code and the Treasury regulations thereunder shall govern and control. I-6 (42) Hour of Service: Each hour for which an individual is directly or indirectly paid, or entitled to payment, by the Employer or a Controlled Entity for the performance of duties or for reasons other than the performance of duties. (43) Investment Fund: A portion of the Trust Fund that is invested in a specified manner as described in Article V. (44) Leased Employee: Each person who is not an employee of the Employer or a Controlled Entity but who performs services for the Employer or a Controlled Entity pursuant to an agreement (oral or written) between the Employer or a Controlled Entity and any leasing organization, provided that such person has performed such services for the Employer or a Controlled Entity or for related persons (within the meaning of section 144(a)(3) of the Code) on a substantially full-time basis for a period of at least one year and such services are performed under primary direction or control by the Employer or a Controlled Entity. (45) Member: Each individual who (A) has met the eligibility requirements for participation in the Plan pursuant to Article II, (B) has made a Rollover Contribution in accordance with Section 3.9, or (C) had an account balance under the Plan as of December 31, 1997. (46) Normal Retirement Date: The date a Member attains the age of sixty-five. (47) Period of Service: Each period of an individual's Service commencing on his Employment Commencement Date or a Reemployment Commencement Date, if applicable, and ending on a Severance from Service Date. Notwithstanding the foregoing, a period during which an individual is absent from Service by reason of the individual's pregnancy, the birth of a child of the individual, the placement of a child with the individual in connection with the adoption of such child by the individual, or for the purposes of caring for such child for the period immediately following such birth or placement shall not constitute a Period of Service between the first and second anniversary of the first date of such absence. A Period of Service shall also include any period required to be credited as a Period of Service by federal law other than the Act or the Code, but only under the conditions and to the extent so required by such federal law. (48) Period of Severance: Each period of time commencing on an individual's Severance from Service Date and ending on a Reemployment Commencement Date. (49) Plan: The NGC Profit Sharing/401(k) Savings Plan, as amended from time to time. (50) Plan Year: The twelve-consecutive month period commencing January 1 of each year. (51) Reemployment Commencement Date: The first date upon which an individual performs an Hour of Service following a Severance from Service Date. (52) Rollover Contribution Account: An individual account for a Member, which is credited with the sum of (A) the amount, if any, credited to such Member's Rollover Contributions I-7 Account as of December 31, 1997, and (B) the Rollover Contributions of such Member and which is credited with (or debited for) such account's allocation of net income (or net loss) and changes in value of the Trust Fund. (53) Rollover Contributions: Contributions made by an Eligible Employee pursuant to Section 3.9. (54) Service: The period of an individual's employment with the Employer or a Controlled Entity. In addition, the Committee may, in its discretion, credit individuals with Service for employment with any other entity, but only if and when such individual becomes an Eligible Employee and only if such crediting of Service (i) has a legitimate business reason, (ii) does not by design or operation discriminate significantly in favor of Highly Compensated Employees, and (iii) is applied to all similarly-situated Eligible Employees. Notwithstanding the foregoing, each Member shall be credited with Service, as of December 31, 1997, in accordance with the provisions of the Plan in effect at such time. (55) Severance from Service Date: The earlier of (A) the first date on which an individual terminates his Service following his Employment Commencement Date or a Reemployment Commencement Date, if applicable, (B) the first anniversary of the first date of a period in which an Employee remains absent from Service (with or without pay) with the Employer for any reason other than an authorized leave of absence, resignation, retirement, discharge, or death, such as vacation, holiday, disability, or lay-off that is not classified by the Employer as a termination of Service, or (C) the second anniversary of the first date of an Employee's authorized leave of absence (with or without pay). Notwithstanding the foregoing, the Severance from Service Date of an individual who is absent from Service by reason of the individual's pregnancy, the birth of a child of the individual, the placement of a child with the individual in connection with the adoption of such child by the individual, or for purposes of caring for such child for the period immediately following such birth or placement shall be the second anniversary of the first date of such absence. (56) Single Plan Member: With respect to a Plan Year, an individual who (A) as of the last day of such Plan Year, is an Eligible Employee and is not currently accruing benefits or earning service credit under the Trident NGL, Inc. Retirement Plan or (B) terminated employment during such Plan Year on or after his Normal Retirement Date or by reason of death or disability (as defined in Section 7.2) and, immediately prior to such termination, was not currently accruing benefits or earning service credit under the Trident NGL, Inc. Retirement Plan. (57) Trident Before-Tax Account: A subaccount of the Before-Tax Account which is credited with the amount, if any, transferred from a Trident Member's Pretax Deferral Account under the Trident Plan and which is credited with (or debited for) such account's allocation of net income (or net loss) and changes in value of the Trust Fund. In addition to other provisions of the Plan, a Member's Trident Before-Tax Account shall be subject to the provisions of Appendix A, and in the event of any conflict, Appendix A shall control. I-8 (58) Trident Matching Account: A subaccount of the Employer Contribution Account which is credited with the amounts, if any, transferred from a Member's Matching Account under the Trident Plan, and which is credited with (or debited for) such account's allocation of net income (or net loss) and changes in value of the Trust Fund. In addition to other provisions of the Plan, a Member's Trident Matching Account shall be subject to the provisions of Appendix A, and in the event of any conflict, Appendix A shall control. (59) Trident Member: A Member with a balance in the Trident NGL, Inc. Savings Plan that was transferred to the Plan. (60) Trident Plan: The Trident NGL, Inc. Savings Plan which was, effective April 1, 1995, merged with and into the Plan. (61) Trident Matching Stock Account: A subaccount of the Trident Matching Account which is credited with the amounts, if any, transferred from a Member's Matching Account under the Trident Plan and that were invested in Company Stock, and which is credited with (or debited for) such account's allocation of net income (or net loss) and changes in value of the Trust Fund. (62) Trident Profit Sharing Stock Account: A subaccount of the Employer Contribution Account which is credited with the amounts, if any, transferred from a Member's Profit Sharing Account under the Trident Plan and that were invested in Company Stock, and which is credited with (or debited for) such account's allocation of net income (or net loss) and changes in value of the Trust Fund. (63) Trident Rollover Account: A subaccount of the Rollover Account which is credited with the amounts, if any, transferred from a Member's Rollover Account under the Trident Plan and which is credited with (or debited for) such account's allocation of net income (or net loss) and changes in value of the Trust Fund. In addition to other provisions of the Plan, a Member's Trident Rollover Account shall be subject to the provisions of Appendix A, and in the event of any conflict, Appendix A shall control. (64) Trust: The trust established herein to hold and invest contributions made under the Plan, and income thereon, and from which the Plan benefits are distributed. (65) Trust Fund: The funds and properties held pursuant to the provisions hereof for the use and benefit of the Members, together with all income, profits, and increments thereto. (66) Trustee: The trustee or trustees qualified and acting hereunder at any time. (67) Vested Interest: The portion of a Member's Accounts which, pursuant to the Plan, is nonforfeitable. (68) Vesting Service: The measure of service used in determining a Member's Vested Interest as determined pursuant to Section 8.4. I-9 I.2 Number and Gender. Wherever appropriate herein, words used in the singular shall be considered to include the plural and words used in the plural shall be considered to include the singular. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender. I.3 Headings. The headings of Articles and Sections herein are included solely for convenience, and if there is any conflict between such headings and the text of the Plan, the text shall control. I.4 Construction. It is intended that the Plan be qualified within the meaning of section 401(a) of the Code and that the Trust be tax exempt under section 501(a) of the Code, and all provisions herein shall be construed in accordance with such intent. I-10 II. Participation 2.1 Eligibility. On or after the Effective Date, each Eligible Employee shall be eligible to become a Member immediately upon his employment as an Eligible Employee. Notwithstanding the foregoing: (a) An individual who was a Member of the Plan on the day prior to the Effective Date shall remain a Member of this restatement thereof as of the Effective Date; (b) An Employee who has not become a Member of the Plan because he was not an Eligible Employee shall be eligible to become a Member of the Plan immediately upon becoming an Eligible Employee as a result of a change in his employment status; and (c) A Member who ceases to be an Eligible Employee but remains an Employee shall continue to be a Member but, on and after the date he ceases to be an Eligible Employee, he shall no longer be entitled to defer Compensation hereunder or share in allocations of Employer Contributions unless and until he shall again become an Eligible Employee. 2.2 Participation. Membership in the Plan is voluntary. Any Eligible Employee may become a Member upon the date he first become eligible pursuant to Section 2.1 by following the procedures prescribed by the Committee within the time limits prescribed by the Committee. Any Eligible Employee who does not become a Member upon the date he first becomes eligible pursuant to Section 2.1 may become a Member on the first day of any subsequent calendar month by timely following the procedures prescribed by the Committee. Notwithstanding the foregoing, membership in the Plan is automatic for any individual who qualifies as a Single Plan Member. II-1 III. Contributions III.1 Before-Tax Contributions. (a) A Member who is an Eligible Employee may elect to defer an integral percentage of from 2% to 12% (or such lesser percentage as may be prescribed from time to time by the Committee) of his Compensation for a Plan Year by having the Employer contribute the amount so deferred to the Plan. Compensation for a Plan Year not so deferred by such election shall be received by such Member in cash. A Member's election to defer an amount of his Compensation pursuant to this Section shall be made by authorizing his Employer, in the manner prescribed by the Committee, to reduce his Compensation in the elected amount and the Employer, in consideration thereof, agrees to contribute an equal amount to the Plan. The reduction in a Member's Compensation for a Plan Year pursuant to his election hereunder shall be effected by Compensation reductions as of each payroll period within such Plan Year following the effective date of such election. The amount of Compensation elected to be deferred by a Member for a Plan Year pursuant to this Section shall become a part of the Employer's Before-Tax Contributions for such Plan Year. (b) A Member's Compensation reduction election shall remain in force and effect for all periods following its effective date until modified or terminated or until such Member ceases to be an Eligible Employee. A Member who has elected to defer a portion of his Compensation may change his deferral election percentage (within the percentage limits set forth in Paragraph (a) above), effective as of the first of any calendar month, by electing a new Compensation reduction percentage in the manner and within the time period prescribed by the Committee. (c) A Member may cancel his Compensation reduction election, effective as of the first day of any calendar month, in accordance with the procedures and within the time period prescribed by the Committee. A Member who so cancels his Compensation reduction election may resume Compensation deferrals, effective as of the first day of any calendar month (provided such Member is an Eligible Employee), by making a new Compensation reduction election in the manner and within the time period prescribed by the Committee. (d) In restriction of the Members' elections provided in Paragraphs (a), (b), and (c) above, the Before-Tax Contributions and the elective deferrals (within the meaning of section 402(g)(3) of the Code) under all other plans, contracts, and arrangements of the Employer on behalf of any Member for any calendar year shall not exceed $7,000 (with such amount to be adjusted automatically to reflect any cost-of-living adjustments authorized by section 402(g)(5) of the Code). (e) In further restriction of the Members' elections provided in Paragraphs (a), (b), and (c) above, it is specifically provided that one of the "actual deferral percentage" tests set forth in section 401(k)(3) of the Code and the Treasury regulations thereunder must be met in each Plan Year. If multiple use of the alternative limitation (within the meaning of section 401(m)(9) of the Code and Treasury regulation (S) 1.401(m)-2(b)) occurs during a Plan Year, such multiple use shall III-1 be corrected in accordance with the provisions of Treasury regulation (S) 1.401 (m)-2(c); provided, however, that if such multiple use is not eliminated by making Employer Safe Harbor Contributions, then the "actual contribution percentages" of all Highly Compensated Employees participating in the Plan shall be reduced, and the excess contributions distributed, in accordance with the provisions of Section 3.8(c) and applicable Treasury regulations, so that there is no such multiple use. (f) If the restrictions set forth in Paragraph (d) or (e) above would not otherwise be met for any Plan Year, the Compensation deferral elections made pursuant to Paragraphs (a), (b), and (c) above of affected Members may be reduced by the Committee on a temporary and prospective basis in such manner as the Committee shall determine. (g) As soon as administratively feasible following the end of each month, but no later than the time required by applicable law, the Employer shall contribute to the Trust, as Before-Tax Contributions with respect to each Member, an amount equal to the amount of Compensation elected to be deferred, pursuant to Paragraphs (a) and (b) above (as adjusted pursuant to Paragraph (f) above), by such Member during such month. Such contributions, as well as the contributions made pursuant to Sections 3.2, 3.3, 3.4, and 3.5, shall be made without regard to current or accumulated profits of the Employer. Notwithstanding the foregoing, the Plan is intended to qualify as a profit sharing plan for purposes of sections 401(a), 402, 412, and 417 of the Code. III.2 Employer Matching Contributions. For each calendar month, the Employer shall contribute to the Trust, as Employer Matching Contributions, an amount that equals 100% of the Before-Tax Contributions that were made pursuant to Section 3.1 on behalf of each of the Members during such month and that were not in excess of 5% of each such Member's Compensation for such month. Employer Matching Contributions shall be made in shares of Company Stock. The shares of Company Stock that are so contributed shall be valued at the closing price of such stock on the New York Stock Exchange, Inc. as reported by The Wall Street Journal in the New York Stock Exchange Composite Transactions for the last day of the month for which the contribution is made (or the next preceding regular business date if the last day of such month is not a regular business date). III.3 Employer Profit Sharing Contributions. For each Plan Year, the Employer shall contribute to the Trust, as an Employer Profit Sharing Contribution, an amount equal to 5% of the Compensation of all Single Plan Members for such Plan Year. III.4 Employer Discretionary Contributions. For each Plan Year, the Employer may contribute to the Trust, as an Employer Discretionary Contribution, an additional amount as determined in its discretion. Employer Discretionary Contributions shall be made in shares of Company Stock. The shares of Company Stock that are so contributed shall be valued at the closing price of such stock on the New York Stock Exchange, Inc. as reported by The Wall Street Journal in the New York Stock Exchange Composite Transactions for the last day of the Plan Year for which the contribution is made (or the next preceding regular business date if the last day of such Plan Year is not a regular business date). III-2 III.5 Employer Safe Harbor Contributions. In addition to the Employer Matching Contributions made pursuant to Section 3.2, the Employer Profit Sharing Contributions made pursuant to Section 3.3, and the Employer Discretionary Contributions made pursuant to Section 3.4, for each Plan Year, the Employer, in its discretion, may contribute to the Trust as a "safe harbor contribution" for such Plan Year the amounts necessary to cause the Plan to satisfy the restrictions set forth in Section 3.1(e) (with respect to certain restrictions on Before-Tax Contributions) and Section 3.6 (with respect to certain restrictions on Employer Matching Contributions). Amounts contributed in order to satisfy the restrictions set forth in Section 3.1(e) shall be considered "qualified matching contributions" (within the meaning of Treasury regulation (S) 1.401(k)-1(g)(13)) for purposes of such Section, and amounts contributed in order to satisfy the restrictions set forth in Section 3.6 shall be considered Employer Matching Contributions for purposes of such Section. Any amounts contributed pursuant to this Paragraph shall be allocated in accordance with the provisions of Sections 4.2(e), (f) and (g). III.6 Restrictions on Employer Matching Contributions. In restriction of the Employer Matching Contributions hereunder, it is specifically provided that one of the "actual contribution percentage" tests set forth in section 401(m) of the Code and the Treasury regulations thereunder must be met in each Plan Year. The Committee may elect, in accordance with applicable Treasury regulations, to treat Before-Tax Contributions to the Plan as Employer Matching Contributions for purposes of meeting this requirement. III.7 Return of Contributions. Anything to the contrary herein notwithstanding, the Employer's contributions to the Plan are contingent upon the deductibility of such contributions under section 404 of the Code. To the extent that a deduction for contributions is disallowed, such contributions shall, upon the written demand of the Employer, be returned to the Employer by the Trustee within one year after the date of disallowance, reduced by any net losses of the Trust Fund attributable thereto but not increased by any net earnings of the Trust Fund attributable thereto. Moreover, if Employer contributions are made under a mistake of fact, such contributions shall, upon the written demand of the Employer, be returned to the Employer by the Trustee within one year after the payment thereof, reduced by any net losses of the Trust Fund attributable thereto but not increased by any net earnings of the Trust Fund attributable thereto. III.8 Disposition of Excess Deferrals and Excess Contributions. (a) Anything to the contrary herein notwithstanding, any Before-Tax Contributions to the Plan for a calendar year on behalf of a Member in excess of the limitations set forth in Section 3.1(d) and any "excess deferrals" from other plans allocated to the Plan by such Member no later than March 1 of the next following calendar year within the meaning of, and pursuant to the provisions of, section 402(g)(2) of the Code, shall be distributed to such Member not later than April 15 of the next following calendar year. (b) Anything to the contrary herein notwithstanding, if, for any Plan Year, the aggregate Before-Tax Contributions made by the Employer on behalf of Highly Compensated Employees exceeds the maximum amount of Before-Tax Contributions permitted on behalf of such Highly Compensated Employees pursuant to Section 3.1(e) (determined by reducing Before-Tax III-3 Contributions on behalf of Highly Compensated Employees in order of the highest dollar amounts contributed on behalf of such Highly Compensated Employees in accordance with section 401(k)(8)(C) of the Code and the Treasury regulations thereunder), such excess shall be distributed to the Highly Compensated Employees on whose behalf such excess was contributed before the end of the next following Plan Year. (c) Anything to the contrary herein notwithstanding, if, for any Plan Year, the aggregate Employer Matching Contributions allocated to the Accounts of Highly Compensated Employees exceeds the maximum amount of such Employer Matching Contributions permitted on behalf of such Highly Compensated Employees pursuant to Section 3.6 (determined by reducing Employer Matching Contributions made on behalf of Highly Compensated Employees in order of the highest dollar amounts contributed on behalf of such Highly Compensated Employees in accordance with section 401(m)(6)(C) of the Code and Treasury regulations thereunder), such excess shall be distributed to the Highly Compensated Employees on whose behalf such excess contributions were made (or, if such excess contributions are forfeitable, they shall be forfeited) before the end of the next following Plan Year. (d) In coordinating the disposition of excess deferrals and excess contributions pursuant to this Section, such excess deferrals and excess contributions shall be disposed of in the following order: (1) First, Before-Tax Contributions that constitute excess deferrals described in Paragraph (a) above that are not considered in determining the amount of Employer Matching Contributions pursuant to Section 3.2 shall be distributed; (2) Next, excess Before-Tax Contributions that constitute excess deferrals described in Paragraph (a) above that are considered in determining the amount of Employer Matching Contributions pursuant to Section 3.2 shall be distributed, and the Employer Matching Contributions with respect to such Before-Tax Contributions shall be forfeited; (3) Next, excess Before-Tax Contributions described in Paragraph (b) above that are not considered in determining the amount of Employer Matching Contributions pursuant to Section 3.3 shall be distributed; (4) Next, excess Before-Tax Contributions described in Paragraph (b) above that are considered in determining the amount of Employer Matching Contributions pursuant to Section 3.3 shall be distributed, and the Employer Matching Contributions with respect to such Before-Tax Contributions shall be forfeited; and (5) Finally, excess Employer Matching Contributions described in Paragraph (c) above shall be distributed (or, if forfeitable, forfeited). (e) Any distribution or forfeiture of excess deferrals or excess contributions pursuant to the provisions of this Section shall be adjusted for income or loss allocated thereto in the manner determined by the Committee in accordance with any method permissible under applicable III-4 Treasury regulations. Any forfeiture pursuant to the provisions of this Section shall be considered to have occurred on the date which is 22 months after the end of the Plan Year. III.9 Rollover Contributions. (a) Qualified Rollover Contributions may be made to the Plan by any Eligible Employee of amounts received by such Eligible Employee from an individual retirement account or annuity or from an employees' trust described in section 401(a) of the Code, which is exempt from tax under section 501(a) of the Code, but only if any such Rollover Contribution is made pursuant to and in accordance with applicable provisions of the Code and Treasury regulations promulgated thereunder. A Rollover Contribution of amounts that are "eligible rollover distributions" within the meaning of section 402(f)(2)(A) of the Code may be made to the Plan irrespective of whether such eligible rollover distribution was paid to the Eligible Employee or paid to the Plan as a "direct" Rollover Contribution. A direct Rollover Contribution to the Plan may be effectuated only by wire transfer directed to the Trustee or by issuance of a check made payable to the Trustee, which is negotiable only by the Trustee and which identifies the Eligible Employee for whose benefit the Rollover Contribution is being made. Any Eligible Employee desiring to effect a Rollover Contribution to the Plan must execute and file with the Committee the form prescribed by the Committee for such purpose. The Committee may require as a condition to accepting any Rollover Contribution that such Eligible Employee furnish any evidence that the Committee in its discretion deems satisfactory to establish that the proposed Rollover Contribution is in fact eligible for rollover to the Plan and is made pursuant to and in accordance with applicable provisions of the Code and Treasury regulations. All Rollover Contributions to the Plan must be made in cash. A Rollover Contribution shall be credited to the Rollover Contribution Account of the Eligible Employee for whose benefit such Rollover Contribution is being made as of the last day of the month in which such Rollover Contribution is made. (b) An Eligible Employee who has made a Rollover Contribution in accordance with this Section, but who has not otherwise become a Member of the Plan in accordance with Section 2.2, shall become a Member coincident with such Rollover Contribution; provided, however, that such Member shall not have a right to defer Compensation or have Employer Contributions made on his behalf until he has otherwise satisfied the requirements imposed by Section 2.2. III-5 IV. Allocations and Limitations IV.1 Suspended Amounts. All contributions, forfeitures, and the net income (or net loss) of the Trust Fund shall be held in suspense until allocated to the Accounts of the Members as provided herein. IV.2 Allocation of Contributions. (a) Before-Tax Contributions made by the Employer on a Member's behalf for each month pursuant to Section 3.1 shall be allocated to such Member's Before-Tax Account. (b) The Employer Matching Contributions for each calendar month pursuant to Section 3.2 shall be allocated to the Employer Contribution Accounts of the Members for whom such contributions were made. (c) The Employer Profit Sharing Contribution made pursuant to Section 3.3 for a Plan Year shall be allocated to the Employer Contribution Accounts of the Single Plan Members for whom such contributions were made. (d) The Employer Discretionary Contribution, if any, made pursuant to Section 3.4 for a Plan Year shall be allocated to the Employer Contribution Accounts of the Single Plan Members who received Compensation for such Plan Year. The allocation to each such eligible Single Plan Member's Employer Contribution Account shall be that portion of such Employer Discretionary Contribution which is in the same proportion that such Single Plan Member's Compensation for such Plan Year bears to the total of all such Single Plan Member's Compensation for such Plan Year. (e) The Employer Safe Harbor Contribution, if any, made pursuant to Section 3.5 for a Plan Year in order to satisfy the restrictions set forth in Section 3.1(e) shall be allocated to the Before-Tax Accounts of Members who (1) received an allocation of Before-Tax Contributions for such Plan Year and (2) were not Highly Compensated Employees for such Plan Year (each such Member individually referred to as an "Eligible Member" for purposes of this Paragraph). Such allocation shall be made, first, to the Before-Tax Account of the Eligible Member who received the least amount of Compensation for such Plan Year until the limitation set forth in Section 4.5 has been reached as to such Eligible Member, then to the Before-Tax Account of the Eligible Member who received the next smallest amount of Compensation for such Plan Year until the limitation set forth in Section 4.5 has been reached as to such Eligible Member, and continuing in such manner until the Employer Safe Harbor Contribution for such Plan Year has been completely allocated or the limitation set forth in Section 4.5 has been reached as to all Eligible Members. Any remaining Employer Safe Harbor Contribution for such Plan Year shall be allocated among the Before- Tax Accounts of all Members who were Eligible Employees during such Plan Year, with the allocation to each such Member's Before-Tax Account being the portion of such remaining Employer Safe IV-1 Harbor Contribution which is in the same proportion that such Member's Compensation for such Plan Year bears to the total of all such Members' Compensation for such Plan Year. (f) The Employer Safe Harbor Contribution, if any, made pursuant to Section 3.5 for a Plan Year in order to satisfy the restrictions set forth in Section 3.6 shall be allocated to the Employer Contribution Accounts of Members who (1) received an allocation of Employer Matching Contributions for such Plan Year and (2) were not Highly Compensated Employees for such Plan Year (each such Member individually referred to as an "Eligible Member" for purposes of this Paragraph). Such allocation shall be made, first, to the Employer Contribution Account of the Eligible Member who received the least amount of Compensation for such Plan Year until the limitation set forth in Section 4.5 has been reached as to such Eligible Member, then to the Employer Contribution Account of the Eligible Member who received the next smallest amount of Compensation for such Plan Year until the limitation set forth in Section 4.5 has been reached as to such Eligible Member, and continuing in such manner until the Employer Safe Harbor Contribution for such Plan Year has been completely allocated or the limitation set forth in Section 4.5 has been reached as to all Eligible Members. Any remaining Employer Safe Harbor Contribution for such Plan Year shall be allocated among the Employer Contribution Accounts of all Members who were Eligible Employees during such Plan Year, with the allocation to each such Member's Employer Contribution Account being the portion of such remaining Employer Safe Harbor Contribution which is in the same proportion that such Member's Compensation for such Plan Year bears to the total of all such Members' Compensation for such Plan Year. (g) If an Employer Safe Harbor Contribution is made in order to satisfy the restrictions set forth in both Section 3.1(e) and Section 3.6 for the same Plan Year, the Employer Safe Harbor Contribution made in order to satisfy the restrictions set forth in Section 3.1(e) shall be allocated pursuant to Paragraph (e) above prior to allocating the Employer Safe Harbor Contribution made in order to satisfy the restrictions set forth in Section 3.6. In determining the application of the limitations set forth in Section 4.5 to the allocations of Employer Safe Harbor Contributions, all Annual Additions (as such term is defined in Section 4.5) to a Member's Accounts other than Employer Safe Harbor Contributions shall be considered allocated prior to Employer Safe Harbor Contributions. (h) All contributions to the Plan shall be considered allocated to Members' Accounts no later than the last day of the Plan Year for which they were made, as determined pursuant to Article III, except that, for purposes of Section 4.4, contributions shall be considered allocated to Members' Accounts when received by the Trustee IV.3 Application of Forfeitures. Any amounts that are forfeited under any provision hereof during a Plan Year shall be applied to reduce Employer Matching Contributions next coming due. Prior to such application, forfeited amounts shall continue to be invested in the same Investment Fund(s) in which they were invested immediately prior to their forfeiture. IV.4 Valuation of Accounts. All amounts contributed to the Trust Fund shall be invested at the time of their receipt by the Trustee, and the balance of each Account shall reflect the result of IV-2 daily pricing of the assets in which such Account is invested from the time of receipt by the Trustee until the time of distribution. IV.5 Limitations and Corrections. (a) For purposes of this Section, the following terms and phrases shall have these respective meanings: (1) "Annual Additions" of a Member for any Limitation Year shall mean the total of (A) the Employer Contributions, Before-Tax Contributions, and forfeitures, if any, allocated to such Member's Accounts for such year, (B) Member's contributions, if any, (excluding any Rollover Contributions) for such year, and (C) amounts referred to in sections 415(l)(1) and 419A(d)(2) of the Code. (2) "Limitation Year" shall mean the Plan Year. (3) "Maximum Annual Additions" of a Member for any Limitation Year shall mean the lesser of (A) $30,000 (or, if greater, one-fourth of the defined benefit dollar limitation in effect under section 415(b)(1)(A) of the Code for such Limitation Year) or (B) 25% of such Member's 415 Compensation, within the meaning of section 415(c)(3) of the Code and applicable Treasury regulations thereunder, during such year except that the limitation in this Clause (B) shall not apply to any contribution for medical benefits (within the meaning of section 419A(f)(2) of the Code) after separation from service with the Employer or a Controlled Entity which is otherwise treated as an Annual Addition or to any amount otherwise treated as an Annual Addition under section 415(l)(1) of the Code. (4) "415 Compensation" shall mean the total of all amounts paid by the Employer to or for the benefit of a Member, for services rendered or labor performed for the Employer while a Member, which are required to be reported on the Member's federal income tax withholding statement or statements (Form W-2 or its subsequent equivalent), limited to $150,000 for any Plan Year with such limitation to be: (A) adjusted automatically to reflect any amendments to section 401(a)(17) of the Code and any cost-of-living increases authorized by section 401(a)(17) of the Code; and (B) prorated for a Plan Year of less than twelve months and to the extent otherwise required by applicable law. (b) Contrary Plan provisions notwithstanding, in no event shall the Annual Additions credited to a Member's Accounts for any Limitation Year exceed the Maximum Annual Additions for such Member for such year. If as a result of a reasonable error in estimating a Member's compensation, a reasonable error in determining the amount of elective deferrals (within the meaning of section 402(g)(3) of the Code) that may be made with respect to any individual under the limits of section 415 of the Code, or because of other limited facts and circumstances, the Annual IV-3 Additions that would be credited to a Member's Accounts for a Limitation Year would nonetheless exceed the Maximum Annual Additions for such Member for such year, the excess Annual Additions which, but for this Section, would have been allocated to such Member's Accounts shall be disposed of as follows: (1) First, any such excess Annual Additions in the form of Before-Tax Contributions on behalf of such Member that would not have been considered in determining the amount of Employer Matching Contributions allocated to such Member's Accounts pursuant to Section 4.2 shall be distributed to such Member, adjusted for income or loss allocated thereto; (2) Next, any such excess Annual Additions in the form of Before- Tax Contributions on behalf of such Member that would have been considered in determining the amount of Employer Matching Contributions allocated to such Member's Accounts pursuant to Section 4.2 shall be distributed to such Member, adjusted for income or loss allocated thereto, and the Employer Matching Contributions that would have been allocated to such Member's Accounts based upon such distributed Before-Tax Contributions shall, to the extent such amounts would have otherwise been allocated to such Member's Accounts, be treated as a forfeiture; (3) Next, any such excess Annual Additions in the form of Employer Profit Sharing Contributions shall, to the extent such amounts would otherwise have been allocated to such Member's Accounts, be treated as a forfeiture; and (4) Finally, any such excess Annual Additions in the form of Employer Discretionary Contributions shall, to the extent such amounts would otherwise have been allocated to such Member's Accounts, be treated as a forfeiture. (c) For purposes of determining whether the Annual Additions under this Plan exceed the limitations herein provided, all defined contribution plans of the Employer are to be treated as one defined contribution plan. In addition, all defined contribution plans of Controlled Entities shall be aggregated for this purpose. For purposes of this Section only, a "Controlled Entity" (other than an affiliated service group member within the meaning of section 414(m) of the Code) shall be determined by application of a more than 50% control standard in lieu of an 80% control standard. If the Annual Additions credited to a Member's Accounts for any Limitation Year under this Plan plus the additions credited on his behalf under other defined contribution plans required to be aggregated pursuant to this Paragraph would exceed the Maximum Annual Additions for such Member for such Limitation Year, the Annual Additions under this Plan and the additions under such other plans shall be reduced on a pro rata basis and allocated, reallocated, or returned in accordance with applicable plan provisions regarding Annual Additions in excess of Maximum Annual Additions. (d) In the case of a Member who also participated in a defined benefit plan of the Employer or a Controlled Entity (as defined in Paragraph (d) above), the Employer shall reduce the Annual Additions credited to the Accounts of such Member under this Plan pursuant to IV-4 the provisions of Paragraph (b) to the extent necessary to prevent the limitation set forth in section 415(e) of the Code from being exceeded. Notwithstanding the foregoing, the provisions of this Paragraph shall apply only if such defined benefit plan does not provide for a reduction of benefits thereunder to ensure that the limitation set forth in section 415(e) of the Code is not exceeded. Further, this Paragraph shall not apply for Limitation Years beginning after December 31, 1999. (e) If the limitations set forth in this Section would not otherwise be met for any Limitation Year, the Compensation deferral elections pursuant to Section 3.1 of affected Members may be reduced by the Committee on a temporary and prospective basis in such manner as the Committee shall determine. IV-5 V. Investment Funds V.1 Investment of Certain Employer Contributions and Accounts. Notwithstanding any provision of Section 5.2 to the contrary, (a) Employer Matching Contributions made to the Plan after April 1, 1995, (b) Employer Discretionary Contributions made to the Plan after April 1, 1995, (c) the balance, if any of a Member's Trident Profit Sharing Stock Account, and (d) the balance, if any, of a Member's Trident Matching Stock Account, and any earnings thereon, shall be invested in the Company Stock Fund. Notwithstanding any provision of Section 5.2 to the contrary, a Member's Dow ESOP Account shall be invested in accordance with Appendix C. All Employer Contributions that were made to the Plan on or before April 1, 1995, and all Employer Profit Sharing Contributions made to the Plan after April 1, 1995, and any earnings thereon, shall be invested pursuant to Section 5.2 of the Plan. V.2 Investment of Accounts. (a) Except as provided in Section 5.1, each Member shall designate, in accordance with the procedures established from time to time by the Committee, the manner in which the amounts allocated to each of his Accounts shall be invested from among the Investment Funds made available from time to time by the Committee. With respect to each portion of a Member's Account that is subject to investment discretion, such Member may designate one of such Investment Funds for all the amounts allocated to such portion of such Account or he may split the investment of the amounts allocated to such portion of such Account between such Investment Funds in such increments as the Committee may prescribe. If a Member fails to make a designation, then such portions of his Accounts shall be invested in the Investment Fund or Funds designated by the Committee from time to time in a uniform and nondiscriminatory manner. (b) Except as provided in Section 5.1, a Member may change his investment designation for future contributions to be allocated to any one or all of his Accounts. Any such change shall be made in accordance with the procedures established by the Committee, and the frequency of such changes may be limited by the Committee. (c) A Member may elect to convert his investment designation with respect to the amounts already allocated to one or more of his Accounts; provided however, that a Member may not covert the investment designation of any amounts allocated to the Company Stock Fund pursuant to Section 5.1. Any such conversion shall be made in accordance with the procedures established by the Committee, and the frequency of such conversions may be limited by the Committee. (d) Paragraphs (a), (b), and (c) above notwithstanding, in no event may a Member direct that any portion of his Accounts which are subject to investment discretion, be invested in the Company Stock Fund. V-1 V.3 Restriction of Acquisition of Company Stock. Notwithstanding any other provision hereof, it is specifically provided that the Trustee shall not purchase Company Stock or other Company securities during any period in which such purchase is, in the opinion of counsel for the Company or the Committee, restricted by any law or regulation applicable thereto. During such period, amounts that would otherwise be invested in Company Stock or other Company securities pursuant to Section 5.1 or an investment designation shall be invested in such other assets as the Trustee may in its discretion determine, or the Trustee may hold such amounts uninvested for a reasonable period pending the purchase of such stock or securities. V.4 Voting of Company Stock. No Member or beneficiary shall have any right to request, direct, or demand that the Committee or the Trustee exercise on his behalf the voting of Company Stock. At each annual meeting and special meeting of the shareholders of the Company, the Committee may, in its sole discretion, direct the Trustee as to the manner in which such shares of Company Stock held by the Plan are to be voted. V.5 Stock Rights, Stock Splits, and Stock Dividends. No Member or beneficiary shall have any right to request, direct, or demand that the Committee or the Trustee exercise in his behalf rights or privileges to acquire, convert, or exchange Company Stock or other securities. The Trustee, in its discretion, may exercise or sell any such rights or privileges. Company Stock received by the Trustee by reason of a stock split, stock dividend, or recapitalization shall be appropriately allocated to the Accounts of each affected Member or beneficiary. V-2 VI. Retirement Benefits A Member who terminates his employment on or after his Normal Retirement Date shall be entitled to a retirement benefit, payable at the time and in the form provided in Article X, equal in value to the aggregate amount in his Accounts on his Annuity Starting Date. Any contribution allocable to a Member's Accounts after his Annuity Starting Date shall be distributed, if his benefit was paid in a lump sum, or used to increase his payments, if his benefit is being paid on a periodic basis, as soon as administratively feasible after the date that such contribution is paid to the Trust Fund. VI-1 VII. Disability Benefits VII.1 Disability Benefits. In the event a Member's employment is terminated, and such Member is totally and permanently disabled, as determined pursuant to Section 7.2, such Member shall be entitled to a disability benefit, payable at the time and in the form provided in Article X, equal in value to the aggregate amount in his Accounts on his Annuity Starting Date. Any contribution allocable to a Member's Accounts after his Annuity Starting Date shall be distributed, if his benefit was paid in a lump sum, or used to increase his payments, if his benefit is being paid on a periodic basis, as soon as administratively feasible after the date that such contribution is paid to the Trust Fund. VII.2 Total and Permanent Disability Determined. A Member shall be considered totally and permanently disabled if the Committee determines, based on a written medical opinion (unless waived by the Committee as unnecessary), that such Member is permanently incapable of performing his job for physical or mental reasons. VII-1 VIII. Severance Benefits and Determination of Vested Interest VIII.1 No Benefits Unless Herein Set Forth. Except as set forth in this Article, upon termination of employment of a Member prior to his Normal Retirement Date for any reason other than total and permanent disability (as defined in Section 7.2) or death, such Member shall acquire no right to any benefit from the Plan or the Trust Fund. VIII.2 Severance Benefit. Each Member whose employment is terminated prior to his Normal Retirement Date for any reason other than total and permanent disability (as defined in Section 7.2) or death shall be entitled to a severance benefit, payable at the time and in the form provided in Article X, equal in value to his Vested Interest in the aggregate amount in his Accounts on his Annuity Starting Date. A Member's Vested Interest in any contribution allocable to such Member's Accounts after his Annuity Starting Date shall be distributed, if his benefit was paid in a lump sum, or used to increase his payments, if his benefit is being paid on a periodic basis, as soon as administratively feasible after the date that such contribution is paid to the Trust Fund. VIII.3 Determination of Vested Interest. (a) A Member shall have a 100% Vested Interest in his Before-Tax Account, Dow ESOP Account, Dow Transfer Account, After-Tax Account, and Rollover Contribution Account at all times. (b) A Member's Vested Interest in his Destec Employer Contribution Account, Trident Matching Account, and Trident Profit Sharing Stock Account shall be determined in accordance with the vesting schedule set forth in paragraph (e) below; provided, however, each Member who, from June 27, 1997, to December 31, 1997, dates inclusive, was involuntarily terminated from employment with Destec Energy, Inc. in connection with the acquisition of Destec Energy, Inc. by the Company and who did not accept employment with the Company or a Controlled Entity on or before December 31, 1997, shall have a 100% Vested Interest in his Destec Employer Contribution Account. (c) A Member shall have a 100% Vested Interest in all Employer Contributions allocated to his Employer Contribution Account (other than contributions allocated to a Member's Destec Employer Contribution Account, Trident Matching Account, or Trident Profit Sharing Stock Account, which shall vest in accordance with paragraph (b) above) under the Plan on or before April 1, 1995, and all earnings thereon. (d) A Member's Vested Interest in Employer Contributions allocated to his Employer Contribution Account (other than contributions allocated to a Member's Destec Employer Contribution Account, Trident Matching Account, or Trident Profit Sharing Stock Account, which shall vest in accordance with paragraph (b) above) under the Plan after April 1, 1995, and the earnings thereon, shall be determined as follows: VIII-1 (1) The Vested Interest in such contributions and earnings of any Member with three or more years of Vesting Service under the Plan as of April 1, 1995, shall be 100%. (2) The Vested Interest in such contributions and earnings of any Member with less than three years of Vesting Service as of April 1, 1995, shall be determined by such Member's years of Vesting Service in accordance with the vesting schedule set forth in paragraph (e) below. (e) Except as provided in paragraphs (b), (c), and (d) above, a Member's Vested Interest in his Employer Contribution Account shall be determined in accordance with the following schedule: Years of Vesting Service Vested Interest ------------------------ --------------- Less than 1 year 0% 1 year 25% 2 years 50% 3 years 75% 4 years or more 100% (f) Paragraphs (b), (d), and (e) above notwithstanding, a Member shall have a 100% Vested Interest in his Employer Contribution Account upon (1) the attainment of his Normal Retirement Date while employed by the Employer or a Controlled Entity, (2) the termination of his employment with the Employer at a time when he is totally and permanently disabled (as defined in Section 7.2), (3) the death of such Member while an Employee, or (4) if such Member is an affected Member, the occurrence of an event described in, under the conditions set forth in, Section 17.2. VIII.4 Crediting of Vesting Service. (a) For the period preceding the Effective Date, subject to the provisions of Paragraphs (e) and (f) below, an individual shall be credited with Vesting Service in an amount equal to all service credited to him for vesting purposes under the Plan as it existed on the day prior to the Effective Date. (b) On or after the Effective Date, subject to the remaining Paragraphs of this Section, an individual shall be credited with Vesting Service in an amount equal to his aggregate Periods of Service whether or not such Periods of Service are completed consecutively. (c) Paragraph (b) above notwithstanding, if an individual terminates his Service (at a time other than during a leave of absence) and subsequently resumes his Service, if his Reemployment Commencement Date is within twelve months of his Severance from Service Date, such Period of Severance shall be treated as a Period of Service for purposes of Paragraph (b) above. VIII-2 (d) Paragraph (b) above notwithstanding, if an individual terminates his Service during a leave of absence and subsequently resumes his Service, if his Reemployment Commencement Date is within twelve months of the beginning of such leave of absence, such Period of Severance shall be treated as a Period of Service for purposes of Paragraph (b) above. VIII.5 Forfeitures of Vesting Service. (a) In the case of an individual who terminates employment at a time when he has a 0% Vested Interest in his Employer Contribution Account and who then incurs a Period of Severance that equals or exceeds the greater of five years or his aggregate Period of Service completed before such Period of Severance, such individual's Period of Service completed before such Period of Severance shall be forfeited and completely disregarded in determining his years of Vesting Service. (b) In the case of a Member who terminates employment with the Employer at a time when he has a Vested Interest in his Employer Contribution Account of more than 0% but less than 100% and then incurs a Period of Severance of five consecutive years, such Member's years of Vesting Service completed after such Period of Severance shall be disregarded for purposes of determining such Member's Vested Interest in any Plan benefits derived from Employer Contributions on his behalf before such Period of Severance, but his years of Vesting Service completed before such Period of Severance shall not be disregarded in determining any Plan benefits derived from Employer Contributions on his behalf after such Period of Severance. (c) A Member who terminates employment with the Employer at a time when he has a 100% Vested Interest shall not forfeit any of his Vesting Service for purposes of determining any Plan benefits. VIII.6 Forfeitures of Nonvested Account Balance. (a) With respect to a Member who terminates employment with the Employer with a Vested Interest in his Employer Contribution Account that is less than 100% and either is not entitled to a distribution from the Plan or receives a distribution from the Plan of the balance of his Vested Interest in his Accounts in the form of a lump sum distribution by the close of the second Plan Year following the Plan Year in which his employment is terminated, the nonvested portion of such terminated Member's Employer Contribution Account as of his Annuity Starting Date shall become a forfeiture as of his Annuity Starting Date (or as of his date of termination of employment if no amount is payable from the Trust Fund on behalf of such Member with such Member being considered to have received a distribution of zero dollars on his date of termination of employment). (b) With respect to a Member who terminates employment with the Employer with a Vested Interest in his Employer Contribution Account greater than 0% but less than 100% and who is not otherwise subject to the forfeiture provisions of Paragraph (a) above (or Section 8.8 below), the nonvested portion of his Employer Contribution Account shall be forfeited VIII-3 as of the earlier of (1) the date the Member completes a Period of Severance of five consecutive years or (2) the date of the terminated Member's death. VIII.7 Restoration of Forfeited Account Balance. In the event that the nonvested portion of a terminated Member's Employer Contribution Account becomes a forfeiture pursuant to Section 8.6, the terminated Member shall, upon subsequent reemployment with the Employer prior to incurring a Period of Severance of five consecutive years, have the forfeited amount restored to such Member's Employer Contribution Account, unadjusted by any subsequent gains or losses of the Trust Fund; provided, however, that such restoration shall be made only if such Member repays in cash an amount equal to the amount so distributed to him pursuant to Section 8.6 within five years from the date the Member is reemployed. A reemployed Member who was not entitled to a distribution from the Plan on his date of termination of employment shall be considered to have repaid a distribution of zero dollars on the date of his reemployment. Any such restoration shall be made as soon as administratively feasible following the date of repayment. Notwithstanding anything to the contrary in the Plan, forfeited amounts to be restored by the Employer pursuant to this Section shall be charged against and deducted from forfeitures for the Plan Year in which such amounts are restored that would otherwise be available to reduce Employer Matching Contributions. If such forfeitures otherwise available are not sufficient to provide such restoration, the portion of such restoration not provided by forfeitures shall be charged against and deducted from Employer Discretionary Contributions otherwise available for allocation to other Members in accordance with Section 4.2(d), and any additional amount needed to restore such forfeited amounts shall be a minimum required Employer Discretionary Contribution. VIII.8 Special Formula for Determining Vested Interest for Partial Accounts. With respect to a Member whose Vested Interest in his Employer Contribution Account Subject to Vesting is less than 100% and who receives a termination distribution from his Employer Contribution Account Subject to Vesting other than a lump sum distribution by the close of the second Plan Year following the Plan Year in which his employment is terminated, any amount remaining in his Employer Contribution Account Subject to Vesting shall continue to be maintained as a separate account. At any relevant time, such Member's nonforfeitable portion of his separate account shall be determined in accordance with the following formula: X=P(AB + (R x D)) - (R x D) For purposes of applying the formula: X is the nonforfeitable portion of such separate account at the relevant time; P is the Member's Vested Interest in his Employer Contribution Account Subject to Vesting at the relevant time; AB is the balance of such separate account at the relevant time; R is the ratio of the balance of such separate account at the relevant time to the balance of such separate account after the distribution; and D is the amount of the distribution. For all other purposes of the Plan, a Member's separate account shall be treated as an Employer Contribution Account. Upon his incurring a Period of Severance of five consecutive years, the forfeitable portion of a terminated Member's separate account and Employer Contribution Account Subject to Vesting shall be forfeited as of the end of the Plan Year during which the terminated Member completes such Period of Severance. VIII-4 IX. Death Benefits Upon the death of a Member while an Employee, the Member's Eligible Surviving Spouse or designated beneficiary shall be entitled to a death benefit, payable at the time and in the form provided in Article X, equal in value to the aggregate amount in his Accounts on his Annuity Starting Date. Any contribution allocable to a Member's Accounts after his Annuity Starting Date shall be distributed, if his benefit was paid in a lump sum, or used to increase payments, if his benefit is being paid on a periodic basis, as soon as administratively feasible after the date that such contribution is paid to the Trust Fund. IX-1 X. Time and Form of Payment of Benefits X.1 Time of Payment. (a) Subject to the provisions of the remaining Paragraphs of this Section, a Member's Annuity Starting Date shall be the date that is as soon as administratively feasible after the date the Member or his beneficiary becomes entitled to a benefit pursuant to Article VI, VII, VIII, or IX but no earlier than the expiration of the seven-day period that begins the day after the information required to be furnished pursuant to Section 10.2(c) has been furnished to the Member. (b) Unless a Member (1) has attained age sixty-five, (2) has died (A) without leaving an Eligible Surviving Spouse or (B) with an election in effect, pursuant to Section 10.3(b), not to receive the standard death benefit set forth in Section 10.3(a), or (3) consents to a distribution pursuant to Paragraph (a) (and, if such Member has an Eligible Surviving Spouse, unless such Eligible Surviving Spouse consents (with such consent being irrevocable) in accordance with the requirements of section 417 of the Code and applicable Treasury regulations thereunder) within the ninety-day period ending on the date payment of his benefit hereunder is to commence pursuant to Paragraph (a), his Annuity Starting Date shall be deferred to the date which is as soon as administratively feasible after the date the Member attains (or would have attained) age sixty- five, or such earlier date as the Member (with the consent of his Eligible Surviving Spouse, if applicable) may elect by written notice to the Committee prior to such date. Consent of the Member's Eligible Surviving Spouse under this Paragraph shall not be required if the Member's benefit is to be paid in the form of the standard benefit described in Section 10.2(a). The Committee shall furnish information pertinent to his consent to each Member no less than thirty days (unless such thirty-day period is waived by an affirmative election in accordance with applicable Treasury regulations) and no more than ninety days before his Annuity Starting Date, and the furnished information shall include a general description of the material features of, and an explanation of the relative values of, the alternative forms of benefit available under the Plan and must inform the Member of his right to defer his Annuity Starting Date and of his Direct Rollover right pursuant to Section 10.5 below, if applicable. In the case of a married Member who dies before his Annuity Starting Date without electing not to receive the standard death benefit set forth in Section 10.3(a), the consent and election set forth in this Paragraph may be made by his Eligible Surviving Spouse. (c) A Member's Annuity Starting Date shall in no event be later than the sixtieth day following the close of the Plan Year during which such Member attains, or would have attained, his Normal Retirement Date or, if later, terminates his employment with the Employer or a Controlled Entity. (d) A Member's Annuity Starting Date shall be in compliance with the provisions of section 401(a)(9) of the Code and applicable Treasury regulations and shall in no event be later than: X-1 (1) For Members attaining age seventy and one-half before January 1, 1999, April 1 of the calendar year following the calendar year in which such Member attains the age of seventy and one-half; (2) For Members attaining age seventy and one-half after December 31, 1998, April 1 of the calendar year following the later of (A) the calendar year in which such Member attains the age of seventy and one-half or (B) the calendar year in which such Member terminates his employment with the Employer (provided, however, that clause (B) of this sentence shall not apply in the case of a Member who is a "five-percent owner" (as defined in section 416 of the Code) with respect to the Plan Year ending in the calendar year in which such Member attains the age of seventy and one- half); and (3) In the case of a benefit payable pursuant to Article IX, (A) if payable to other than the Member's spouse, the last day of the one-year period following the death of such Member or (B) if payable to the Member's spouse, after the date upon which such Member would have attained the age of seventy and one-half, unless such surviving spouse dies before payments commence, in which case the Annuity Starting Date may not be deferred beyond the last day of the one-year period following the death of such surviving spouse. The preceding provisions of this Section notwithstanding, a Member may not elect to defer the receipt of his benefit hereunder to the extent that such deferral creates a death benefit that is more than incidental within the meaning of section 401(a)(9)(G) of the Code and applicable Treasury regulations thereunder. Further, in determining compliance with the provisions of section 401(a)(9) of the Code, the life expectancies of a Member and the Member's spouse shall not be recalculated after the Annuity Starting Date. Finally, a Member (other than a Member who is a "five-percent owner" (as defined in section 416 of the Code) with respect to the Plan Year ending in the calendar year in which such Member attains the age of seventy and one-half) who attains age seventy and one-half in calendar year 1996, 1997, or 1998 may elect to defer his Annuity Starting Date until no later than April 1 of the calendar year following the later of (A) the calendar year in which such Member attains the age of seventy and one-half or (B) the calendar year in which such Member terminates his employment with the Employer, provided, that such election is made by the later of the end of the calendar year in which such Member attains age seventy and one-half or December 31, 1997. (e) Subject to the provisions of Paragraph (d), a Member's Annuity Starting Date shall not occur unless the Article VI, VII, VIII, or IX event entitling the Member (or his beneficiary) to a benefit constitutes a distributable event described in section 401(k)(2)(B) of the Code and shall not occur while the Member is employed by the Employer or any Controlled Entity (irrespective of whether the Member has become entitled to a distribution of his benefit pursuant to Article VI, VII, VIII, or IX). (f) Paragraphs (a), (b) and (c) notwithstanding, a Member whose Vested Interest in his Accounts is $5,000 or more may elect to defer his Annuity Starting Date beyond the date specified in such Paragraphs, subject to the provisions of Paragraph (d), by submitting to the X-2 Committee a written statement, signed by the Member, which describes the benefit and designates the date on which the payment of such benefit shall commence. X.2 Standard and Alternative Forms of Benefit for Members. (a) For purposes of Article VI, VII, or VIII, the standard benefit for any Member who is married on his Annuity Starting Date shall be a joint and survivor annuity. Such joint and survivor annuity shall be a commercial annuity which is payable for the life of the Member with a survivor annuity for the life of the Member's Eligible Surviving Spouse which shall be one-half of the amount of the annuity payable during the joint lives of the Member and the Member's Eligible Surviving Spouse. The standard benefit for any Member who is not married on his Annuity Starting Date shall be a commercial annuity which is payable for the life of the Member. (b) Any Member who would otherwise receive the standard benefit may elect not to take his benefit in such form by executing the form prescribed by the Committee for such election during the election period described in Paragraph (c) below. Any election may be revoked and subsequent elections may be made or revoked at any time during such election period. Notwithstanding the foregoing, an election by a married Member not to receive the standard benefit as provided in Paragraph (a) above shall not be effective unless (1) the Eligible Surviving Spouse has consented thereto in writing (including consent to the specific designated beneficiary to receive payments following the Member's death or to the specific benefit form elected, which designation or election may not subsequently be changed by the Member without spousal consent) and such consent acknowledges the effect of such election and is witnessed by a Plan representative (other than the Member) or a notary public or (2) the consent of such spouse cannot be obtained because the Eligible Surviving Spouse cannot be located or because of other circumstances described by applicable Treasury regulations. Any such consent by such Eligible Surviving Spouse shall be irrevocable. (c) The Committee shall furnish certain information, pertinent to the Paragraph (b) election, to each Member no less than thirty days (unless such thirty-day period is waived by an affirmative election in accordance with applicable Treasury regulations) and no more than ninety days before his Annuity Starting Date. The furnished information shall include an explanation of (1) the terms and conditions of the standard benefit, (2) the Member's right to elect to waive the standard benefit and the effect of such election, (3) the rights of the Member's Eligible Surviving Spouse, if any, (4) the right to revoke such election and the effect of such revocation, (5) a general description of the eligibility conditions and other material features of the alternative forms of benefit available pursuant to Paragraph (d) below, and (6) sufficient additional information to explain the relative values of such alternative forms of benefit. The period of time during which a Member may make or revoke such election shall be the ninety-day period ending on such Member's Annuity Starting Date provided that such election may also be revoked at any time prior to the expiration of the seven-day period that begins the day after the information required to be furnished pursuant to this Paragraph has been furnished to the Member. (d) For purposes of Article VI, VII, or VIII, the benefit for any Member who has elected not to receive the standard benefit shall be paid in one of the following alternative forms to X-3 be selected by the Member or, in the absence of such election, by the Committee; provided, however, that the period and method of payment of any such form shall be in compliance with the provisions of section 401(a)(9) of the Code and applicable Treasury regulations thereunder: (1) A commercial annuity in the form of a single life annuity for the life of such Member. (2) A commercial annuity (A) for the joint lives of the Member and any person designated by the Member, (B) for a term certain (of 5, 10, or 15 years) and continuous for the life of the Member if he survives such term certain, or (C) for a term certain to the Member and any designated beneficiary of the Member if the Member does not survive such term certain. (3) A lump sum. (4) Periodic installment payments to such Member for a term certain or, in the event of such Member's death before the end of such term certain, to his designated beneficiary; provided, however, that such term certain shall not exceed the lesser of (i) ten years or (ii) the life expectancy of the Member or the joint and last survivor expectancy of the Member and his designated beneficiary. Upon the death of a beneficiary who is receiving installment payments under this Paragraph, the remaining balance in the Member's Accounts shall be paid as soon as administratively feasible, in one lump sum cash payment, to the beneficiary's executor or administrator or to his heirs at law if there is no administration of such beneficiary's estate. (e) If a Member, who terminated his employment under circumstances such that he was entitled to a benefit pursuant to Article VI, VII, or VIII, dies prior to his Annuity Starting Date, the amount of the benefit to which he was entitled shall be paid pursuant to Section 10.3 just as if such Member had died while employed by the Employer except that his Vested Interest shall be determined pursuant to Article VI, VII, or VIII, whichever is applicable. X.3 Standard and Alternative Forms of Death Benefit. (a) For purposes of Article IX, the standard death benefit for a deceased Member who leaves an Eligible Surviving Spouse shall be a survivor annuity. Such survivor annuity shall be a commercial annuity which is payable for the life of such Eligible Surviving Spouse. (b) Any Member who would otherwise have his death benefit paid in the standard survivor annuity form may elect not to have his benefit paid in such form by executing the beneficiary designation form prescribed by the Committee and filing same with the Committee, designating a primary beneficiary other than his Eligible Surviving Spouse or electing some form of payment other than a survivor annuity. Any election may be revoked and subsequent elections may be made or revoked at any time prior to a Member's date of death. X-4 (c) Paragraph (b) above to the contrary notwithstanding: (1) An election not to have the death benefit paid in the standard survivor annuity form as provided in Paragraph (a) above shall not be effective unless (A) the Eligible Surviving Spouse has consented thereto in writing and such consent (i) acknowledges the effect of such election, (ii) either consents to the specific designated beneficiary (which designation may not subsequently be changed by the Member without spousal consent) or expressly permits such designation by the Member without the requirement of further consent by the spouse, and (iii) is witnessed by a Plan representative (other than the Member) or a notary public or (B) the consent of such spouse cannot be obtained because the Eligible Surviving Spouse cannot be located or because of other circumstances described by applicable Treasury regulations. Any such consent by such Eligible Surviving Spouse shall be irrevocable. (2) An election not to have the death benefit paid in the standard survivor annuity form may be made before the first day of the Plan Year in which a Member attains the age of thirty-five only (A) after the Member separates from service and only with respect to benefits accrued under the Plan before the date of such separation and (B) in the case of a Member who has not separated from service, if the Member has been furnished the information described in Paragraph (d), with such election to become invalid upon the first day of the Plan Year in which the Member attains the age of thirty-five, whereupon a new election may be made by such Member. (d) The Committee shall furnish certain information pertinent to the Paragraph (b) election to each Member within the period beginning with the first day of the Plan Year in which he attains the age of thirty-two (but no earlier than the date such Member begins participation in the Plan) and ending with the later of (1) the last day of the Plan Year preceding the Plan Year in which the Member attains the age of thirty-five or (2) a reasonable time after the Employee becomes a Member. If a Member separates from service before attaining age thirty-five, such information shall be furnished to such Member within the period beginning one year before the Member separates from service and ending one year after such separation. Such information shall also be furnished to a Member who has not attained the age of thirty-five or terminated employment, within a reasonable time after written request by such Member. The furnished information shall include an explanation of (1) the terms and conditions of the survivor annuity, (2) the Member's right to elect to waive the survivor annuity and the effect of such election, (3) the rights of the Member's Eligible Surviving Spouse, (4) the right to revoke such election and the effect of such revocation, (5) a general description of the eligibility conditions and other material features of the alternative forms of benefit available pursuant to Paragraph (f) below, and (6) sufficient additional information to explain the relative value of such alternative forms of benefit. (e) In the event a survivor annuity is to be paid to a Member's Eligible Surviving Spouse, such Eligible Surviving Spouse may elect to receive the benefit in one of the alternative forms set forth in Section 10.3(f). Within a reasonable time after written request by such Eligible Surviving Spouse, the Committee shall provide to such Eligible Surviving Spouse a written X-5 explanation of such survivor annuity form and the alternative forms of payment which may be selected along with the financial effect of each such form. (f) For purposes of Article IX, the death benefit of a deceased Member who is not survived by an Eligible Surviving Spouse or who has elected not to have his death benefit paid in the standard survivor annuity form set forth in Section 10.3(a) shall be paid to his designated beneficiary in one of the following alternative forms to be selected by such beneficiary or, in the absence of such selection, by the Committee; provided, however, that the period and method of payment of any such form shall be in compliance with the provisions of section 401(a)(9) of the Code and applicable Treasury regulations thereunder: (1) A commercial annuity in the form of a single life annuity for the life of the designated beneficiary. (2) A lump sum. (g) If a deceased Member who either is not survived by an Eligible Surviving Spouse or has elected (with spousal consent) not to have his standard death benefit paid in the standard survivor annuity form set forth in Section 10.3(a) does not have a valid beneficiary designation on file with the Committee at the time of his death, the designated beneficiary or beneficiaries to receive such Member's death benefit shall be as follows: (1) If a Member leaves an Eligible Surviving Spouse, his designated beneficiary shall be such Eligible Surviving Spouse; (2) If a Member leaves no Eligible Surviving Spouse, his designated beneficiary shall be (A) such Member's executor or administrator or (B) his heirs at law if there is no administration of such Member's estate. X.4 Cash-Out of Benefit. If a Member terminates his employment and his Vested Interest in his Accounts is not in excess of $5,000, such Member's benefit shall be paid in one lump sum payment in lieu of any other form of benefit herein provided. Any such payment shall be made at the time specified in Section 10.1(a) without regard to the consent restrictions of Section 10.1(b) and the election and spousal consent requirements of Sections 10.2 and 10.3 except that a married Member's death benefit shall be paid to his Eligible Surviving Spouse unless another beneficiary has been designated pursuant to the provisions of Section 10.3(b). The provisions of this Section shall not be applicable to a Member following his Annuity Starting Date. X.5 Direct Rollover Election. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee's election under this Section, a Distributee may elect, at the time and in the manner prescribed by the Committee, to have all or any portion of an Eligible Rollover Distribution (other than any portion attributable to the offset of an outstanding loan balance of such Member pursuant to the Plan's loan procedure) paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. The preceding sentence notwithstanding, a Distributee may elect a Direct Rollover pursuant to this Section only if such Distributee's Eligible X-6 Rollover Distributions during the Plan Year are reasonably expected to total $200 or more. Furthermore, if less than 100% of the Member's Eligible Rollover Distribution is to be a Direct Rollover, the amount of the Direct Rollover must be $500 or more. Prior to any Direct Rollover pursuant to this Section, the Committee may require the Distributee to furnish the Committee with a statement from the plan, account, or annuity to which the benefit is to be transferred verifying that such plan, account, or annuity is, or is intended to be, an Eligible Retirement Plan. X.6 Benefits from Account Balances. With respect to any benefit payable in any form pursuant to the Plan, such benefit shall be provided from the Account balance(s) to which the particular Member or beneficiary is entitled. X.7 Distributions of Company Stock and Dow Stock. Benefits shall be paid (or transferred pursuant to Section 10.5) in cash except that (A) a Member (or his designated beneficiary or legal representative in the case of a deceased Member) may elect to have the portion of his Accounts invested in the Company Stock Fund distributed (or transferred pursuant to Section 10.5) in full shares of Company Stock to the extent of the Member's pro rata portion of the shares of Company Stock held in the Company Stock Fund with any balance of the Member's interest in the Company Stock Fund (including fractional shares) to be paid or transferred in cash; (B) the portion of a Member's Dow ESOP Account invested in whole shares of Dow Stock shall be distributed (or transferred pursuant to Section 10.5) in shares of Dow Stock unless such Member (or his designated beneficiary or legal representative in the case of a deceased Member) elects to have such portion paid or transferred in cash; and (C) to the extent possible, a Member (or his designated beneficiary or legal representative in the case of a deceased Member) may elect to have his Destec Accounts, if any, paid (or transferred pursuant to Section 10.5) in kind. X.8 Commercial Annuities. At the direction of the Committee, the Trustee may pay any form of benefit provided hereunder other than a lump sum payment or a Direct Rollover pursuant to Section 10.5 by the purchase of a commercial annuity contract and the distribution of such contract to the Member or beneficiary. Thereupon, the Plan shall have no further liability with respect to the amount used to purchase the annuity contract and such Member or beneficiary shall look solely to the company issuing such contract for such annuity payments. All certificates for commercial annuity benefits shall be nontransferable, except for surrender to the issuing company, and no benefit thereunder may be sold, assigned, discounted, or pledged (other than as collateral for a loan from the company issuing same). Notwithstanding the foregoing, the terms of any such commercial annuity contract shall conform with the time of payment, form of payment, and consent provisions of Sections 10.1, 10.2, and 10.3. X.9 Unclaimed Benefits. In the case of a benefit payable on behalf of a Member, if the Committee is unable to locate the Member or beneficiary to whom such benefit is payable, upon the Committee's determination thereof, such benefit shall be forfeited. Notwithstanding the foregoing, if subsequent to any such forfeiture the Member or beneficiary to whom such benefit is payable makes a valid claim for such benefit, such forfeited benefit shall be restored to the Plan in the manner provided in Section 8.7. X-7 X.10 Claims Review. (a) In any case in which a claim for Plan benefits of a Member or beneficiary is denied or modified, the Committee shall furnish written notice to the claimant within ninety days (or within 180 days if additional information requested by the Committee necessitates an extension of the ninety-day period and the claimant is informed of such extension in writing within the original ninety-day period), which notice shall: (1) State the specific reason or reasons for the denial or modification; (2) Provide specific reference to pertinent Plan provisions on which the denial or modification is based; (3) Provide a description of any additional material or information necessary for the Member, his beneficiary, or representative to perfect the claim and an explanation of why such material or information is necessary; and (4) Explain the Plan's claim review procedure as described in Paragraph (b) below. (b) In the event a claim for Plan benefits is denied or modified, if the Member, his beneficiary, or a representative of such Member or beneficiary desires to have such denial or modification reviewed, he must, within sixty days following receipt of the notice of such denial or modification, submit a written request for review by the Committee of its initial decision. In connection with such request, the Member, his beneficiary, or the representative of such Member or beneficiary may review any pertinent documents upon which such denial or modification was based and may submit issues and comments in writing. Within sixty days following such request for review the Committee shall, after providing a full and fair review, render its final decision in writing to the Member, his beneficiary, or the representative of such Member or beneficiary stating specific reasons for such decision and making specific references to pertinent Plan provisions upon which the decision is based. If special circumstances require an extension of such sixty-day period, the Committee's decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review. If an extension of time for review is required, written notice of the extension shall be furnished to the Member, beneficiary, or the representative of such Member or beneficiary prior to the commencement of the extension period. X-8 XI. In-Service Withdrawals XI.1 In-Service Withdrawals. (a) A Member may withdraw any or all amounts held in his After-Tax Account. (b) A Member who has a financial hardship, as determined by the Committee, and who has made all available withdrawals pursuant to Paragraph (a) above and Appendices A, B, and/or C hereunder, as applicable, and pursuant to the provisions of any other plans of the Employer and any Controlled Entities of which he is a member and who has obtained all available loans pursuant to Article XII and pursuant to the provisions of any other plans of the Employer and any Controlled Entities of which he is a member may withdraw from his Rollover Contribution Account and his Before-Tax Account amounts not to exceed the amount determined by the Committee as being available for withdrawal pursuant to this Paragraph. Such withdrawal shall come, first, from the Member's Rollover Contribution Account and, second, from his Before-Tax Account. For purposes of this Paragraph, financial hardship shall mean the immediate and heavy financial needs of the Member. A withdrawal based upon financial hardship pursuant to this Paragraph shall not exceed the amount required to meet the immediate financial need created by the hardship and not reasonably available from other resources of the Member. The amount required to meet the immediate financial need may include any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution. The determination of the existence of a Member's financial hardship and the amount required to be distributed to meet the need created by the hardship shall be made by the Committee. The decision of the Committee shall be final and binding, provided that all Members similarly situated shall be treated in a uniform and nondiscriminatory manner. A withdrawal shall be deemed to be made on account of an immediate and heavy financial need of a Member if the withdrawal is for: (1) Expenses for medical care described in section 213(d) of the Code previously incurred by the Member, the Member's spouse, or any dependents of the Member (as defined in section 152 of the Code) or necessary for those persons to obtain medical care described in section 213(d) of the Code and not reimbursed or reimbursable by insurance; (2) Costs directly related to the purchase of a principal residence of the Member (excluding mortgage payments); (3) Payment of tuition and related educational fees, and room and board expenses, for the next twelve months of post-secondary education for the Member or the Member's spouse, children, or dependents (as defined in section 152 of the Code); (4) Payments necessary to prevent the eviction of the Member from his principal residence or foreclosure on the mortgage of the Member's principal residence; or XI-1 (5) Such other financial needs that the Commissioner of Internal Revenue may deem to be immediate and heavy financial needs through the publication of revenue rulings, notices, and other documents of general applicability. The above notwithstanding, (1) withdrawals under this Paragraph from a Member's Before-Tax Account shall be limited to the sum of the Member's Before-Tax Contributions to the Plan, plus income allocable thereto and credited to the Member's Before-Tax Account as of December 31, 1988, less any previous withdrawals of such amounts, and (2) amounts allocated to a Member's Before-Tax Account pursuant to the provisions of Section 4.2(e) shall not be subject to withdrawal. A Member who makes a withdrawal from his Before-Tax Account under this Paragraph may not make elective contributions or employee contributions to the Plan or any other qualified or nonqualified plan of the Employer or any Controlled Entity for a period of twelve months following the date of such withdrawal. Further, such Member may not make elective contributions under the Plan or any other plan maintained by the Employer or any Controlled Entity for such Member's taxable year immediately following the taxable year of the withdrawal in excess of the applicable limit set forth in Section 3.1(d) for such next taxable year less the amount of such Member's elective contributions for the taxable year of the withdrawal. XI.2 Restriction on In-Service Withdrawals. (a) All withdrawals pursuant to this Article shall be made in accordance with the provisions and within the time period prescribed by the Committee prior to the proposed date of withdrawal. (b) Notwithstanding the provisions of this Article, (i) not more than one withdrawal pursuant to Section 11.1(a) shall be made in any one calendar quarter, and (ii) no withdrawal shall be made from an Account to the extent such Account has been pledged to secure a loan from the Plan. (c) If a Member's Account from which a withdrawal is made is invested in more than one Investment Fund, the withdrawal shall be made pro rata from each Investment Fund in which such Account is invested. (d) All withdrawals under this Article shall be paid in cash. (e) Any withdrawal hereunder shall be subject to the Direct Rollover election described in Section 10.5. (f) Except as provided in Appendix A and Appendix B, this Article shall not be applicable to a Member following termination of employment and the amounts in such Member's Accounts shall be distributable only in accordance with the provisions of Article X. XI-2 XII. Loans XII.1 Eligibility for Loan. (a) Upon application by (1) any Member who is an Employee or (2) any Member no longer employed by the Employer, a beneficiary of a deceased Member, or an alternate payee under a qualified domestic relations order, as that term is defined in section 414(p)(8) of the Code, who retains an Account balance under the Plan and who is a party-in-interest, as that term is defined in section 3(14) of the Act, as to the Plan (an individual who is eligible to apply for a loan under this Article being hereinafter referred to as a "Member" for purposes of this Article) and subject to such uniform and nondiscriminatory rules and regulations as the Committee may establish, the Committee may in its discretion direct the Trustee to make a loan or loans to such Member. (b) No loan shall be made to a Member who owes any amount on an outstanding loan previously made to him from the Plan. XII.2 Maximum Loan. (a) A loan to a Member may not exceed 50% of the then value of such Member's Vested Interest in his Accounts and no loan may be made for an amount which would require the liquidation of a Member's Dow ESOP Account or the portion of a Member's Employer Contribution Account which is invested in the Company Stock Fund. (b) Paragraph (a) above to the contrary notwithstanding, the amount of a loan made to a Member under this Article shall not exceed an amount equal to the difference between: (1) The lesser of $50,000 (reduced by the excess, if any, of (A) the highest outstanding balance of loans from the Plan during the one-year period ending on the day before the date on which the loan is made over (B) the outstanding balance of loans from the Plan on the date on which the loan is made) or one-half of the present value of the Member's total nonforfeitable accrued benefit under all qualified plans of the Employer or a Controlled Entity; minus (2) The total outstanding loan balance of the Member under all other loans from all qualified plans of the Employer or a Controlled Entity. XII.3 Minimum Loan. A loan to a Member may not be for an amount less than $1,000.00. XII.4 Interest and Security. XII-1 (a) Any loan made pursuant to this Article shall bear interest at a rate established by the Committee from time to time and communicated to the Members, which rate shall provide the Plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances. (b) Any loan shall be made as an investment of a segregated loan fund to be established in the Trust Fund for the Member to whom the loan is made. Any loan shall be considered to come, first, from the Member's After-Tax Account, second, from the Member's Rollover Contribution Account, third, from the Member's Vested Interest in the portion of his Employer Contribution Account that is not invested in the Company Stock Fund, fourth, from the Member's Dow Transfer Account, and, finally, from the Member's Before-Tax Account. The Trustee shall fund a Member's segregated loan fund by liquidating such portion of the assets of the Accounts from which the Member's loan is to be made as is necessary to fund the loan and transferring the proceeds to such segregated loan fund. If a Member's Accounts are invested in more than one Investment Fund, the transfer shall be made pro rata from each such Investment Fund; provided however, that no loan shall be funded from the portion of a Member's Employer Contribution Account that is invested in the Company Stock Fund. The loan shall be secured by a pledge of the Member's segregated loan fund. XII.5 Repayment Terms of Loan. (a) The Member shall be required, as a condition to receiving a loan, to enter into an irrevocable agreement authorizing the Employer to make payroll deductions from his Compensation so long as the Member is an Employee and to transfer such payroll deduction amounts to the Trustee in payment of such loan plus interest. (b) The terms of the loan shall (1) require level amortization with payments not less frequently than quarterly, (2) require that the loan be repaid within five years unless the Member certifies in writing to the Committee that the loan is to be used to acquire any dwelling unit which within a reasonable time is to be used (determined at the time the loan is made) as a principal residence of the Member, (3) allow prepayment without penalty, provided that any prepayment must be for the full outstanding loan balance (including interest), and (4) require that the balance of the loan (including interest) shall become due and payable (to the extent not otherwise due and payable) on the date the Member or, if applicable, the Member's beneficiary, is first entitled to a distribution pursuant to Article VI, VII, VIII, or IX, irrespective of whether such Member or beneficiary elects or consents to such distribution and that such Member's outstanding loan balance (including interest) shall be repaid by offsetting such balance against the amount in the Member's segregated loan fund pledged as security for the loan. By agreeing to the pledge of the segregated loan fund as security for the loan, a Member shall be deemed to have consented to the distribution of such segregated loan fund prior to the time specified in section 411(a)(11) of the Code and the applicable Treasury regulations thereunder. (c) If the Member fails in any way to comply with the repayment terms of a loan, such loan shall be repaid by offsetting the Member's outstanding loan balance (including interest) against the amount in the Member's segregated loan fund pledged as security for the loan. Any such XII-2 outstanding loan balance (including interest) shall be so offset and repaid as soon as administratively feasible after such failure to comply, and such repayment shall be prior to any withdrawal or distribution of benefits from the pledged portion of the Member's Accounts pursuant to the provisions of the Plan. Notwithstanding the foregoing, amounts in a Member's Before-Tax Account may not be used to satisfy the payment of such loan (including interest) prior to the time such amounts are otherwise distributable from the Plan, and amounts in a Member's Employer Contribution Account may not be offset and used to satisfy the payment of such loan (including interest) prior to the earliest time such amounts are otherwise permitted to be distributed under applicable law. (d) The above notwithstanding, a Member who is on an unpaid leave of absence from the Employer may elect to suspend payments on his loan during such leave of absence for a period of up to one year. Upon such Member's return to active employment with the Employer at the conclusion of such leave of absence or upon the expiration of such one-year period, if earlier, such Member shall be permitted to refinance his loan, including all accrued and unpaid interest, over a term that does not extend beyond the expiration of the original term of the loan. (e) Amounts tendered to the Trustee by a Member in repayment of a loan made pursuant to this Article (1) shall initially be credited to the Member's segregated loan fund, (2) then shall be transferred as soon as practicable following receipt thereof to the Account or Accounts from which the Member's loan was made, and (3) invested in accordance with the Member's current designation as to the investment of contributions pursuant to Section 5.2. XII.6 Operation of Article. The provisions of this Article shall be applicable to loans granted or renewed after January 1, 1998. Loans granted or renewed on or prior to such date shall be governed by the provisions of the Plan as in effect prior to this amendment and restatement of the Plan. XII-3 XIII. Administration of the Plan XIII.1 General Administration of the Plan. The general administration of the Plan shall be vested in the Committee. For purposes of the Act, the Committee shall be the Plan "administrator" and shall be the "named fiduciary" with respect to the general administration of the Plan (except as to the investment of the assets of the Trust Fund). XIII.2 Records and Procedures. The Committee shall keep appropriate records of its proceedings and the administration of the Plan and shall make available for examination during business hours to any Member or beneficiary such records as pertain to that individual's interest in the Plan. The Committee shall designate the person or persons who shall be authorized to sign for the Committee and, upon such designation, the signature of such person or persons shall bind the Committee. XIII.3 Meetings. The Committee shall hold meetings upon such notice and at such time and place as it may from time to time determine. Notice to a member shall not be required if waived in writing by that member. A majority of the members of the Committee duly appointed shall constitute a quorum for the transaction of business. All resolutions or other actions taken by the Committee at any meeting where a quorum is present shall be by vote of a majority of those present at such meeting and entitled to vote. Resolutions may be adopted or other action taken without a meeting upon written consent signed by all of the members of the Committee. XIII.4 Self-Interest of Members. No member of the Committee shall have any right to vote or decide upon any matter relating solely to himself under the Plan or to vote in any case in which his individual right to claim any benefit under the Plan is particularly involved. In any case in which a Committee member is so disqualified to act and the remaining members cannot agree, the Directors shall appoint a temporary substitute member to exercise all the powers of the disqualified member concerning the matter in which he is disqualified. XIII.5 Compensation and Bonding. The members of the Committee shall not receive compensation with respect to their services for the Committee. To the extent required by the Act or other applicable law, or required by the Company, members of the Committee shall furnish bond or security for the performance of their duties hereunder. XIII.6 Committee Powers and Duties. The Committee shall supervise the administration and enforcement of the Plan according to the terms and provisions hereof and shall have all powers necessary to accomplish these purposes, including, but not by way of limitation, the right, power, authority, and duty: (a) To make rules, regulations, and bylaws for the administration of the Plan that are not inconsistent with the terms and provisions hereof, provided such rules, regulations, and bylaws are evidenced in writing and copies thereof are delivered to the Trustee and to XIII-1 the Company, and to enforce the terms of the Plan and the rules and regulations promulgated thereunder by the Committee; (b) To construe in its discretion all terms, provisions, conditions, and limitations of the Plan, and, in all cases, the construction necessary for the Plan to qualify under the applicable provisions of the Code shall control; (c) To correct any defect or to supply any omission or to reconcile any inconsistency that may appear in the Plan in such manner and to such extent as it shall deem expedient in its discretion to effectuate the purposes of the Plan; (d) To employ and compensate such accountants, attorneys, investment advisors, and other agents, employees, and independent contractors as the Committee may deem necessary or advisable for the proper and efficient administration of the Plan; (e) To determine in its discretion all questions relating to eligibility; (f) To make a determination in its discretion as to the right of any person to a benefit under the Plan and to prescribe procedures to be followed by distributees in obtaining benefits hereunder; (g) To prepare, file, and distribute, in such manner as the Committee determines to be appropriate, such information and material as is required by the reporting and disclosure requirements of the Act; (h) To furnish the Employer any information necessary for the preparation of such Employer's tax return or other information that the Committee determines in its discretion is necessary for a legitimate purpose; (i) To require and obtain from the Employer and the Members any information or data that the Committee determines is necessary for the proper administration of the Plan; (j) To instruct the Trustee as to the loans to Members pursuant to the provisions of Article XII; (k) To direct the Trustee as to voting of Company Stock pursuant to the provisions of Section 5.4; (l) To appoint investment managers pursuant to Section 15.5; (m) To receive and review reports from the Trustee and from investment managers as to the financial condition of the Trust Fund, including its receipts and disbursements; and XIII-2 (n) To establish or designate Investment Funds as investment options as provided in Article V. XIII.7 Employer to Supply Information. The Employer shall supply full and timely information to the Committee, including, but not limited to, information relating to each Member's Compensation, age, retirement, death, or other cause of termination of employment and such other pertinent facts as the Committee may require. The Employer shall advise the Trustee of such of the foregoing facts as are deemed necessary for the Trustee to carry out the Trustee's duties under the Plan. When making a determination in connection with the Plan, the Committee shall be entitled to rely upon the aforesaid information furnished by the Employer. XIII.8 Indemnification. The Company shall indemnify and hold harmless each member of the Committee and each Employee who is a delegate of the Committee against any and all expenses and liabilities arising out of his administrative functions or fiduciary responsibilities, including any expenses and liabilities that are caused by or result from an act or omission constituting the negligence of such individual in the performance of such functions or responsibilities, but excluding expenses and liabilities that are caused by or result from such individual's own gross negligence or willful misconduct. Expenses against which such individual shall be indemnified hereunder shall include, without limitation, the amounts of any settlement or judgment, costs, counsel fees, and related charges reasonably incurred in connection with a claim asserted or a proceeding brought or settlement thereof. XIII-3 XIV. Trustee and Administration of Trust Fund XIV.1 Appointment, Resignation, Removal, and Replacement of Trustee. (a) The Trustee shall be appointed, removed, and replaced by and in the sole discretion of the Directors. The Trustee shall be the "named fiduciary" with respect to investment of the Trust Fund's assets. (b) Any Trustee may resign at any time by giving at least thirty days' written notice of such resignation to the Directors. Any Trustee may be removed, with or without cause, by the Directors on written notice of such removal to such Trustee. The Directors may appoint a successor Trustee by written designation, a copy of which shall be delivered to the Committee and the former Trustee. If there would be no other Trustee then acting, the actual appointment and qualification of a successor Trustee to whom the Trust Fund may be transferred are conditions which must be fulfilled before the resignation or removal of a Trustee shall become effective. The Directors may by resolution increase or decrease the number of Trustees at any time acting hereunder. XIV.2 Acceptance of Fund. The Trustee accepts the Trust Fund hereunder and agrees to accept and retain, manage, administer and hold the Trust Fund in accordance with the terms and provisions of this Plan. The Trustee shall receive any securities or other properties that are tendered to the Trustee pursuant to the Plan that are acceptable to the Trustee. XIV.3 Committee Discharging Duty. The Trustee may assume that the Committee is discharging its duties under the Plan until and unless the Trustee is notified to the contrary in writing by any person known to be a member of the Committee or by the Employer. Upon receipt of such notice, the Trustee may, if the Trustee so desires, apply to a court of competent jurisdiction for guidance with respect to the disposition of the Trust Fund. XIV.4 Taxes. If, pursuant to the provisions of any law now or hereafter enacted, any tax shall be imposed upon the Trustee with respect to the assets or income of the Trust Fund, the Trustee (without the necessity of any direction or approval by the Committee) may pay such tax from the Trust Fund, provided such payment is not otherwise prohibited by law. The Trustee, however, shall not be obligated to pay any such tax as long as the validity thereof is contested in good faith. In determining whether or not to pay any such tax, the Trustee may obtain the advice of counsel (including, but not limited to, counsel for the Employer or the Committee). XIV.5 Investment of the Trust Fund. The Committee shall have the exclusive authority and discretion to select the Investment Funds available for investment under the Plan. The Committee shall notify the Trustee in writing of any changes in the selection of Investment Funds available for investment under the Plan. Each Member shall have the exclusive right, in accordance with Section 5.2 and subject to the limitations of Section 5.1, to direct the investment by the Trustee XIV-1 of all amounts allocated to such Member's Accounts among one or more of the available Investment Funds. All investment directions by Members shall be timely furnished to the Trustee by the Committee, except to the extent such directions are transmitted telephonically or otherwise by Members directly to the Trustee or its delegate in accordance with the procedures established by the Committee and communicated to the Trustee. In making any investment of the assets of the Trust, except as provided in Section 5.3, the Trustee shall be fully entitled to rely on such directions furnished by the Committee or by Members in accordance with the procedures established by the Committee, and shall be under no duty to make any inquiry or investigation with respect thereto. If the Trustee receives any contribution under the Plan that is not accompanied by instructions directing its investment, the Trustee shall promptly notify the Committee of that fact, and the Trustee shall invest such contribution in such assets as the Trustee may in its discretion determine, or the Trustee may hold such amounts uninvested for a reasonable period pending the receipt of directions from the Committee. XIV.6 Powers of the Trustee. Subject to any limitations stated elsewhere herein, in addition to the authority, rights, privileges, powers, and duties elsewhere herein vested in the Trustee and those now or hereafter conferred by law, the Trustee shall also have the following authority, rights, privileges, powers, and duties: (a) To hold, manage, control, collect, and use the Trust Fund in accordance with the terms of this instrument; (b) To sell (for cash or on credit, or both), exchange, or otherwise dispose of, the whole or any part of the Trust Fund, at public or private sale; to lease (including, but not limited to, oil, gas, or mineral leases), rent, mortgage (including purchase money mortgages), pledge, or otherwise encumber the whole or any part of the Trust Fund; and to loan or borrow money in any manner, including by joint and several obligations, all upon such terms, regardless of the duration of the Trust, as the Trustee may deem advisable (provided that neither the Employer nor any Member may borrow from the Trust Fund except as otherwise permitted herein); (c) To invest or reinvest the Trust Fund in property of any description whatsoever (including, but not limited to, oil, gas, or mineral interests; common or preferred stock; shares of investment trusts or companies; bills, notes, and other evidences of indebtedness; non-income producing property; and property outside of Texas); (d) To make or hold investments of any part of the Trust Fund in common or undivided interest with other persons or entities, including an undivided interest in any property in which any Trustee, individually or otherwise, may hold an undivided interest; to buy from or sell to any person or entity to the extent not otherwise prohibited herein; (e) To make commingled, collective, or common investments and to invest and reinvest all or any portion of the Trust Fund collectively with funds of other pension and profit sharing trusts exempt from tax under section 501(a) of the Code by reason of qualifying under section 401(a) of said Code, including, without limitation, power to invest XIV-2 collectively with such other funds through the medium of one or more of the common, collective, or commingled trust funds, which has been or may hereafter be established and maintained by the Trustee or its affiliates. To the extent of the interest of the Trust Fund in any such collective trust, the agreement or declaration of trust establishing such collective trust shall be deemed to be adopted and made a part of the Plan and Trust as if set forth in full herein; (f) To deposit or invest all or a part of the Trust Fund in savings accounts, certificates of deposit, or other deposits that bear a reasonable rate of interest in a bank or similar financial institution, including the commercial department of the Trustee, if such bank or other institution is supervised by any agency of a state or the federal government. (g) To employ and compensate such attorneys, counsel, brokers, banks, investment advisors, or other agents, employees, or independent contractors and to delegate to them such of the duties, rights, and powers of the Trustee as may be deemed advisable in handling and administering the Plan; (h) To partition any property or interest held as a part of the Trust Fund and, in any and all such partitions, to pay or receive such money or property as may be necessary or advisable to equalize differences and to evaluate any property belonging to the Trust Fund; (i) To institute, join in, maintain, defend, compromise, submit to arbitration, or settle any litigation, claim, obligation, or controversy with respect to any matter affecting the Trust Fund, regardless of the manner in which such matter may have arisen, all in the name of the Trustee and without the joinder of any Member; and (j) To hold uninvested for a reasonable period of time any moneys received by it until the same shall be invested or disbursed pursuant to the provisions of the Plan. The Trustee is also authorized to exercise all the rights, powers, options, and privileges now or hereafter granted to, provided for, or vested in trustees under the laws of the State of Illinois, except as such may conflict with the terms of this instrument or applicable law. As far as possible, no subsequent legislation or regulation shall be in limitation of the rights, powers, or privileges granted the Trustee hereunder or set forth under the laws of the State of Illinois as such laws exist at the time of the execution hereof. Generally, the Trustee shall have, hold, manage, control, use, invest and reinvest, disburse, and dispose of the Trust Fund under all circumstances to the same extent as if the Trustee were the owner thereof in fee simple, subject only to such limitations as are contained herein and such applicable laws as cannot be waived. This instrument shall always be construed in favor of the validity of any act or omission by or of the Trustee. Notwithstanding the foregoing, the Trustee may not invest the Trust Fund assets in any Company security that is not a "qualifying Company security" or in any Company real property that is not "qualifying Company real property." The Trustee may, however, acquire "qualifying Company securities" or "qualifying Company real property" as an investment, provided that any such acquisition or investment will not result in the Trust Fund's holding more than 100% of the then fair market value of the assets of the Trust Fund in "qualifying Company securities" and "qualifying Company real property." The term "qualifying XIV-3 Company securities" means stock or marketable obligations of the Company or an affiliate. The term "qualifying Company real property" means parcels of real property leased to the Company or an affiliate if a substantial number of the parcels are dispersed geographically and if each such parcel is suitable for, or adaptable to, more than one use. XIV.7 Compensation, Expenses, and Bond of Trustee. Unless prohibited by Section 14.11, the Trustee shall receive such compensation for services as Trustee hereunder as may be agreed upon from time to time by the Company and the Trustee. The Trustee shall be reimbursed for all reasonable expenses incurred while acting as Trustee as provided in Section 14.11. No bond or other security shall be required of the Trustee unless otherwise required by law or by the Company. XIV.8 Reliance. The Trustee shall be fully protected in relying upon a resolution of the Directors as to the membership of the Committee as it then exists and in continuing to rely upon such resolution until a subsequent resolution is filed with the Trustee by the Directors. The Trustee may accept as true all papers, certificates, statements, and representations of fact that are presented to the Trustee by the Committee without investigation, questioning, or verification if the Trustee believes same to be true and authentic, and the Trustee may rely solely on the written advice of the Committee with respect to any question of fact. XIV.9 Accounting. As soon as practicable after the end of each Plan Year, the Trustee shall render a written accounting of the administration of the Trust Fund showing all receipts and disbursements during the year and the then value of the assets of the Trust Fund. This accounting shall be transmitted to the Committee and to the Company. XIV.10 Judicial Protection. The Trustee may seek judicial protection by any action or proceeding deemed necessary to settle the accounts of the Trustee or may obtain a judicial determination or a declaratory judgment as to a question of construction of the Plan. The Trustee must join as parties defendant in any such action only the Committee and the Company, although the Trustee may join other parties if the Trustee deems it advisable to do so. XIV.11 Payment of Expenses. All expenses incident to the administration of the Plan and Trust, including but not limited to, legal, accounting, Trustee fees, expenses of the Committee, and the cost of furnishing any bond or security required of the Committee shall be paid by the Trustee from the Trust Fund, and, until paid, shall constitute a claim against the Trust Fund which is paramount to the claims of Members and beneficiaries; provided, however, that (a) the obligation of the Trustee to pay such expenses from the Trust Fund shall cease to exist to the extent such expenses are paid by the Employer and (b) in the event the Trustee's compensation is to be paid, pursuant to this Section, from the Trust Fund, any individual serving as Trustee who already receives full-time pay from an employer or an association of employers whose employees are participants in the Plan, or from an employee organization whose members are participants in the Plan, shall not receive any additional compensation for serving as Trustee. This Section shall be deemed to be a part of any contract to provide for expenses of Plan and Trust administration, whether or not the signatory to such contract is, as a matter of convenience, the Employer. XIV-4 XIV.12 Trust Fund Property. All income, profits, recoveries, contributions, forfeitures, and any and all moneys, securities, and properties of any kind at any time received or held by the Trustee hereunder shall be held for investment purposes as a commingled Trust Fund. The Committee shall maintain Accounts in the name of each Member, but the maintenance of an Account designated as the Account of a Member shall not mean that such Member shall have a greater or lesser interest than that due him by operation of the Plan and shall not be considered as segregating any funds or property from any other funds or property contained in the commingled fund. No Member shall have any title to any specific asset in the Trust Fund. XIV.13 Distributions from Members' Accounts. Distributions from a Member's Accounts shall be made by the Trustee only if, when, and in the amount and manner directed in writing by the Committee. Any distribution made to a Member or for his benefit shall be debited to such Member's Account or Accounts. All distributions hereunder shall be made in cash except as otherwise specifically provided herein. XIV.14 Payments Solely from Trust Fund. All benefits payable under the Plan shall be paid or provided for solely from the Trust Fund, and neither the Employer nor the Trustee assumes any liability or responsibility for the adequacy thereof. The Committee or the Trustee may require execution and delivery of such instruments as are deemed necessary to assure proper payment of any benefits. XIV.15 No Benefits to the Employer. No part of the corpus or income of the Trust Fund shall be used for any purpose other than the exclusive purpose of providing benefits for the Members and their beneficiaries and of defraying reasonable expenses of administering the Plan. Anything to the contrary herein notwithstanding, the Plan shall not be construed to vest any rights in the Employer other than those specifically given hereunder. XIV.16 Indemnification. The Company shall indemnify the Trustee against any and all claims, liabilities, costs or expenses, including reasonable attorneys' fees, incurred by the Trustee resulting from the acts, omissions, or breach or an alleged breach of a fiduciary duty owed to the Plan, by a party other than the Trustee, including, but not limited to, any acts, omissions, or fiduciary duty or responsibility owned to the Plan by an investment manager appointed pursuant to Section 15.5, any predecessor trustee, or the Committee; provided, however, that nothing herein shall be construed as an indemnification of the Trustee for any claims, liabilities, costs, and expenses resulting from the breach by the Trustee of the Trustee's own fiduciary duties with respect to the Plan or the Trust or the Trustee's own negligence or willful misconduct. XIV-5 XV. Fiduciary Provisions XV.1 Article Controls. This Article shall control over any contrary, inconsistent or ambiguous provisions contained in the Plan. XV.2 General Allocation of Fiduciary Duties. Each fiduciary with respect to the Plan shall have only those specific powers, duties, responsibilities and obligations as are specifically given him under the Plan. The Directors shall have the sole authority to appoint and remove the Trustee. Except as otherwise specifically provided herein, the Committee shall have the sole responsibility for the administration of the Plan, which responsibility is specifically described herein. Except as otherwise specifically provided herein, the Trustee shall have the sole responsibility for the administration, investment, and management of the assets held under the Plan. It is intended under the Plan that each fiduciary shall be responsible for the proper exercise of his own powers, duties, responsibilities, and obligations hereunder and shall not be responsible for any act or failure to act of another fiduciary except to the extent provided by law or as specifically provided herein. XV.3 Fiduciary Duty. Each fiduciary under the Plan, including, but not limited to, the Committee and the Trustee as "named fiduciaries," shall discharge his duties and responsibilities with respect to the Plan: (a) Solely in the interest of the Members, for the exclusive purpose of providing benefits to Members and their beneficiaries and of defraying reasonable expenses of administering the Plan; (b) With the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; (c) By diversifying the investments of the Plan so as to minimize the risk of large losses, unless under the circumstances it is prudent not to do so; and (d) In accordance with the documents and instruments governing the Plan insofar as such documents and instruments are consistent with applicable law. No fiduciary shall cause the Plan or Trust Fund to enter into a "prohibited transaction" as provided in section 4975 of the Code or section 406 of the Act. XV.4 Delegation and Allocation of Fiduciary Duties. The Committee may appoint subcommittees, individuals, or any other agents as it deems advisable and may delegate to any of such appointees any or all of the powers and duties of the Committee. Such appointment and delegation must be in writing, specifying the powers or duties being delegated, and must be accepted in writing by the delegatee. Upon such appointment, delegation, and acceptance, the delegating XV-1 Committee members shall have no liability for the acts or omissions of any such delegatee, as long as the delegating Committee members do not violate any fiduciary responsibility in making or continuing such delegation. XV.5 Investment Manager. The Committee may, in its sole discretion, appoint an "investment manager," with power to select any or all of the Investment Funds available pursuant to Section 5.2 and/or with power to manage, acquire, or dispose of any asset of the Plan and to direct the Trustee in this regard, so long as: (a) The investment manager is (1) registered as an investment adviser under the Investment Advisers Act of 1940, (2) a bank, as defined in the Investment Advisers Act of 1940, or (3) an insurance company qualified to do business under the laws of more than one state; and (b) Such investment manager acknowledges in writing that he is a fiduciary with respect to the Plan. Upon such appointment, the Committee shall not be liable for the acts of the investment manager, as long as the Committee members do not violate any fiduciary responsibility in making or continuing such appointment. The Trustee shall follow the directions of such investment manager and shall not be liable for the acts or omissions of such investment manager. The investment manager may be removed by the Committee at any time and within its sole discretion. XV-2 XVI. Amendments XVI.1 Right to Amend. Subject to Section 16.2 and any other limitations contained in the Act or the Code, the Directors may from time to time amend, in whole or in part, any or all of the provisions of the Plan on behalf of the Company and all Employers. Specifically, but not by way of limitation, the Directors may make any amendment necessary to acquire and maintain a qualified status for the Plan under the Code, whether or not retroactive. XVI.2 Limitation on Amendments. No amendment of the Plan shall be made that would vest in the Employer, directly or indirectly, any interest in or control of the Trust Fund. No amendment shall be made that would vary the Plan's exclusive purpose of providing benefits to Members and their beneficiaries and of defraying reasonable expenses of administering the Plan or that would permit the diversion of any part of the Trust Fund from that exclusive purpose. No amendment shall be made that would reduce any then nonforfeitable interest of a Member. No amendment shall increase the duties or responsibilities of the Trustee unless the Trustee consents thereto in writing. XVI-1 XVII. Discontinuance of Contributions, Termination, Partial Termination, and Merger or Consolidation XVII.1 Right to Discontinue Contributions, Terminate, or Partially Terminate. The Employer has established the Plan with the bona fide intention and expectation that from year to year it will be able to, and will deem it advisable to, make its contributions as herein provided. However, the Directors realize that circumstances not now foreseen, or circumstances beyond its control, may make it either impossible or inadvisable for the Employer to continue to make its contributions to the Plan. Therefore, the Directors shall have the power to discontinue contributions to the Plan, terminate the Plan, or partially terminate the Plan at any time hereafter. Each member of the Committee and the Trustee shall be notified of such discontinuance, termination, or partial termination. XVII.2 Procedure in the Event of Discontinuance of Contributions, Termination, or Partial Termination. (a) If the Plan is amended so as to permanently discontinue Employer Contributions, or if Employer Contributions are in fact permanently discontinued, the Vested Interest of each affected Member shall be 100%, effective as of the date of discontinuance. In case of such discontinuance, the Committee shall remain in existence and all other provisions of the Plan that are necessary, in the opinion of the Committee, for equitable operation of the Plan shall remain in force. (b) If the Plan is terminated or partially terminated, the Vested Interest of each affected Member shall be 100%, effective as of the termination date or partial termination date, as applicable. Unless the Plan is otherwise amended prior to dissolution of the Company, the Plan shall terminate as of the date of dissolution of the Company. (c) Upon discontinuance of contributions, termination, or partial termination, any previously unallocated contributions, forfeitures, and net income (or net loss) shall be allocated among the Accounts of the Members on such date of discontinuance, termination, or partial termination according to the provisions of Article IV. Thereafter, the net income (or net loss) shall continue to be allocated to the Accounts of the Members until the balances of the Accounts are distributed. (d) In the case of a termination or partial termination of the Plan, and in the absence of a Plan amendment to the contrary, the Trustee shall pay the balance of the Accounts of a Member for whom the Plan is so terminated, or who is affected by such partial termination, to such Member, subject to the time of payment, form of payment, and consent provisions of Article X. XVII.3 Merger, Consolidation, or Transfer. This Plan and Trust Fund may not merge or consolidate with, or transfer its assets or liabilities to, any other plan, unless immediately thereafter each Member would, in the event such other plan terminated, be entitled to a benefit which is equal XVII-1 to or greater than the benefit to which he would have been entitled if the Plan were terminated immediately before the merger, consolidation, or transfer. XVII-2 XVIII. Participating Employers XVIII.1 Participation and Designation of Other Employers. (a) The Committee may designate any entity or organization eligible by law to participate in the Plan and the Trust as an Employer by written instrument delivered to the Secretary of the Company and the designated Employer. Such written instrument shall specify the effective date of such designated participation, may incorporate specific provisions relating to the operation of the Plan which apply to the designated Employer only and shall become, as to such designated Employer and its Employees, a part of the Plan. (b) Each designated Employer and each Employer listed in Section 1.1(32) shall be conclusively presumed to have consented to its designation or participation, as applicable, and to have agreed to be bound by the terms of the Plan and any and all amendments thereto upon its submission of information to the Committee required by the terms of or with respect to the Plan or upon making a contribution to the Trust Fund pursuant to the terms of the Plan; provided, however, that the terms of the Plan may be modified so as to increase the obligations of an Employer only with the consent of such Employer, which consent shall be conclusively presumed to have been given by such Employer upon its submission of any information to the Committee required by the terms of or with respect to the Plan or upon making a contribution to the Trust Fund pursuant to the terms of the Plan following notice of such modification. (c) The provisions of the Plan shall apply separately and equally to each Employer and its Employees in the same manner as is expressly provided for the Company and its Employees, except that the power to appoint or otherwise affect the Committee or the Trustee and the power to amend or terminate the Plan shall be exercised by the Directors alone. (d) Transfer of employment among Employers shall not be considered a termination of employment hereunder, and Service with one shall be considered as Service with all others. (e) Any Employer may, by appropriate action of its Board of Directors or noncorporate counterpart that is communicated in writing to the Secretary of the Company and to the Committee, terminate its participation in the Plan and the Trust. Moreover, the Committee may, in its discretion, terminate an Employer's Plan and Trust participation at any time by written instrument delivered to the Secretary of the Company and the designated Employer. XVIII.2 Single Plan. For purposes of the Code and the Act, the Plan as adopted by the Employers shall constitute a single plan rather than a separate plan of each Employer. All assets in the Trust Fund shall be available to pay benefits to all Members and their beneficiaries. XVIII-1 XIX. Miscellaneous Provisions XIX.1 Not Contract of Employment. The adoption and maintenance of the Plan shall not be deemed to be a contract between the Employer and any person or to be consideration for the employment of any person. Nothing herein contained shall be deemed to give any person the right to be retained in the employ of the Employer or to restrict the right of the Employer to discharge any person at any time nor shall the Plan be deemed to give the Employer the right to require any person to remain in the employ of the Employer or to restrict any person's right to terminate his employment at any time. XIX.2 Alienation of Interest Forbidden. Except as otherwise provided with respect to "qualified domestic relations orders" pursuant to section 206(d) of the Act and sections 401(a)(13) and 414(p) of the Code and except as otherwise provided under other applicable law, no right or interest of any kind in any benefit shall be transferable or assignable by any Member or any beneficiary or be subject to anticipation, adjustment, alienation, encumbrance, garnishment, attachment, execution, or levy of any kind. Plan provisions to the contrary notwithstanding, the Committee shall comply with the terms and provisions of any "qualified domestic relations order," including an order that requires distributions to an alternate payee prior to a Member's "earliest retirement age" as such term is defined in section 206(d)(3)(E)(ii) of the Act and section 414(p)(4)(B) of the Code, and shall establish appropriate procedures to effect the same. XIX.3 Uniformed Services Employment and Reemployment Rights Act Requirements. Notwithstanding any provision of the Plan to the contrary, contributions, benefits, and service credit with respect to qualified military service will be provided in accordance with section 414(u) of the Code. XIX.4 Corrective Contributions and Distributions. The Employer shall be permitted to make corrective contributions and or distributions to Members and former Members (including former Members who are no longer Employees) (collectively, the "Covered Members") in order to comply with the terms of any compliance statement (a "Compliance Statement") issued by the Internal Revenue Service under the Voluntary Compliance Resolution Program applicable to the Plan as a means of correcting any operational or other defect subject to the Compliance Statement. The amount of such contributions and the manner of their allocation among Covered Members shall be determined in accordance with the provisions of the Compliance Statement. XIX.5 Payments to Minors and Incompetents. If a Member or beneficiary entitled to receive a benefit under the Plan is a minor or is determined by the Committee in its discretion to be incompetent or is adjudged by a court of competent jurisdiction to be legally incapable of giving valid receipt and discharge for a benefit provided under the Plan, the Committee may pay such benefit to the duly appointed guardian or conservator of such Member or beneficiary for the account of such Member or beneficiary. If no guardian or conservator has been appointed for such Member or beneficiary, the Committee may pay such benefit to any third party who is determined by the XIX-1 Committee, in its sole discretion, to be authorized to receive such benefit for the account of such Member or beneficiary. Such payment shall operate as a full discharge of all liabilities and obligations of the Committee, the Trustee, the Employer, and any fiduciary of the Plan with respect to such benefit. XIX.6 Member's Address. It shall be the affirmative duty of each Member to inform the Committee of, and to keep on file with the Committee, his current mailing address and the current mailing address of his designated beneficiary. If a Member fails to keep the Committee informed of his current mailing address and the current mailing address of his designated beneficiary, neither the Committee, the Trustee, the Employer, nor any fiduciary under the Plan shall be responsible for any late or lost payment of a benefit or for failure of any notice to be provided timely under the terms of the Plan. XIX.7 Severability. If any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions hereof; instead, each provision shall be fully severable and the Plan shall be construed and enforced as if said illegal or invalid provision had never been included herein. XIX.8 Jurisdiction. The situs of the Plan is Texas. Except to the extent preempted by federal law, (a) the provisions of Article XIV shall be construed in accordance with the laws of Illinois and (b) all other provisions of the Plan shall be construed in accordance with the laws of Texas. XIX-2 XX. Top-Heavy Status XX.1 Article Controls. Any Plan provisions to the contrary notwithstanding, the provisions of this Article shall control to the extent required to cause the Plan to comply with the requirements imposed under section 416 of the Code. XX.2 Definitions. For purposes of this Article, the following terms and phrases shall have these respective meanings: (a) Account Balance: As of any Valuation Date, the aggregate amount credited to an individual's account or accounts under a qualified defined contribution plan maintained by the Employer or a Controlled Entity (excluding employee contributions that were deductible within the meaning of section 219 of the Code and rollover or transfer contributions made after December 31, 1983, by or on behalf of such individual to such plan from another qualified plan sponsored by an entity other than the Employer or a Controlled Entity), increased by (1) the aggregate distributions made to such individual from such plan during a five-year period ending on the Determination Date and (2) the amount of any contributions due as of the Determination Date immediately following such Valuation Date. (b) Accrued Benefit: As of any Valuation Date, the present value (computed on the basis of the Assumptions) of the cumulative accrued benefit (excluding the portion thereof that is attributable to employee contributions that were deductible pursuant to section 219 of the Code, to rollover or transfer contributions made after December 31, 1983, by or on behalf of such individual to such plan from another qualified plan sponsored by an entity other than the Employer or a Controlled Entity, to proportional subsidies or to ancillary benefits) of an individual under a qualified defined benefit plan maintained by the Employer or a Controlled Entity increased by (1) the aggregate distributions made to such individual from such plan during a five-year period ending on the Determination Date and (2) the estimated benefit accrued by such individual between such Valuation Date and the Determination Date immediately following such Valuation Date. Solely for the purpose of determining top-heavy status, the Accrued Benefit of an individual shall be determined under (1) the method, if any, that uniformly applies for accrual purposes under all qualified defined benefit plans maintained by the Employer and the Controlled Entities or (2) if there is no such method, as if such benefit accrued not more rapidly than under the slowest accrual rate permitted under section 411(b)(1)(C) of the Code. (c) Aggregation Group: The group of qualified plans maintained by the Employer and each Controlled Entity consisting of (1) each plan in which a Key Employee participates and each other plan that enables a plan in which a Key Employee participates to meet the requirements of section 401(a)(4) or 410 of the Code or (2) each plan in which a Key Employee participates, each other plan that enables a plan in which a Key Employee participates to meet the requirements of section 401(a)(4) or 410 of the Code and any other XX-1 plan that the Employer elects to include as a part of such group; provided, however, that the Employer may elect to include a plan in such group only if the group will continue to meet the requirements of sections 401(a)(4) and 410 of the Code with such plan being taken into account. (d) Assumptions: The interest rate and mortality assumptions specified for top-heavy status determination purposes in any defined benefit plan included in the Aggregation Group which includes the Plan. (e) Determination Date: For the first Plan Year of any plan, the last day of such Plan Year and for each subsequent Plan Year of such plan, the last day of the preceding Plan Year. (f) Key Employee: A "key employee" as defined in section 416(i) of the Code and the Treasury regulations thereunder. (g) Plan Year: With respect to any plan, the annual accounting period used by such plan for annual reporting purposes. (h) Remuneration: Compensation within the meaning of section 415(c)(3) of the Code, as limited by section 401(a)(17) of the Code. (i) Valuation Date: With respect to any Plan Year of any defined contribution plan, the most recent date within the twelve-month period ending on a Determination Date as of which the trust fund established under such plan was valued and the net income (or loss) thereof allocated to participants' accounts. With respect to any Plan Year of any defined benefit plan, the most recent date within a twelve-month period ending on a Determination Date as of which the plan assets were valued for purposes of computing plan costs for purposes of the requirements imposed under section 412 of the Code. XX.3 Top-Heavy Status. XX-2 (a) The Plan shall be deemed to be top-heavy for a Plan Year if, as of the Determination Date for such Plan Year, (1) the sum of Account Balances of Members who are Key Employees exceeds 60% of the sum of Account Balances of all Members unless an Aggregation Group including the Plan is not top-heavy or (2) an Aggregation Group including the Plan is top-heavy. An Aggregation Group shall be deemed to be top-heavy as of a Determination Date if the sum (computed in accordance with section 416(g)(2)(B) of the Code and the Treasury regulations promulgated thereunder) of (1) the Account Balances of Key Employees under all defined contribution plans included in the Aggregation Group and (2) the Accrued Benefits of Key Employees under all defined benefit plans included in the Aggregation Group exceeds 60% of the sum of the Account Balances and the Accrued Benefits of all individuals under such plans. Notwithstanding the foregoing, the Account Balances and Accrued Benefits of individuals who are not Key Employees in any Plan Year but who were Key Employees in any prior Plan Year shall not be considered in determining the top-heavy status of the Plan for such Plan Year. Further, notwithstanding the foregoing, the Account Balances and Accrued Benefits of individuals who have not performed services for the Employer or any Controlled Entity at any time during the five-year period ending on the applicable Determination Date shall not be considered. (b) If the Plan is determined to be top-heavy for a Plan Year, the Employer shall contribute to the Plan for such Plan Year on behalf of each Member who is not a Key Employee and who has not terminated his employment as of the last day of such Plan Year an amount equal to: (1) The lesser of (A) 3% of such Member's Remuneration for such Plan Year or (B) a percent of such Member's Remuneration for such Plan Year equal to the greatest percent determined by dividing for each Key Employee the amounts allocated to such Key Employee's Before-Tax Account and Employer Contribution Account for such Plan Year by such Key Employee's Remuneration; reduced by (2) The amount of the sum of Employer Profit Sharing Contributions and Employer Discretionary Contributions allocated to such Member's Accounts for such Plan Year. The minimum contribution required to be made for a Plan Year pursuant to this Paragraph for a Member employed on the last day of such Plan Year shall be made regardless of whether such Member is otherwise ineligible to receive an allocation of the Employer's contributions for such Plan Year. The minimum contribution required to be made pursuant to this Paragraph shall also be made for an Eligible Employee who is not a Key Employee and who is excluded from participation in the Plan solely because of failing to make Before-Tax Contributions. Notwithstanding the foregoing, if the Plan is deemed to be top- heavy for a Plan Year, the Employer's contribution for such Plan Year pursuant to this Paragraph shall be increased by substituting "4%" in lieu of "3%" in Clause (1) hereof to the extent that the Directors determine to so increase such contribution to comply with the provisions of section 416(h)(2) of the Code. Notwithstanding the foregoing, no contribution shall be made pursuant to this Paragraph for a Plan Year with respect to a Member who is a participant in another defined contribution plan sponsored by the Employer or a Controlled Entity if such Member receives under such other defined contribution plan (for the plan year of such plan ending with or within the Plan Year of the Plan) a contribution which is equal to or greater than the XX-3 minimum contribution required by section 416(c)(2) of the Code. Notwithstanding the foregoing, no contribution shall be made pursuant to this Paragraph for a Plan Year with respect to a Member who is a participant in a defined benefit plan sponsored by the Employer or a Controlled Entity if such Member accrues under such defined benefit plan (for the plan year of such plan ending with or within the Plan Year of this Plan) a benefit that is at least equal to the benefit described in section 416(c)(1) of the Code. If the preceding sentence is not applicable, the requirements of this Paragraph shall be met by providing a minimum benefit under such defined benefit plan which, when considered with the benefit provided under the Plan as an offset, is at least equal to the benefit described in section 416(c)(1) of the Code. XX.4 Termination of Top-Heavy Status. If the Plan has been deemed to be top-heavy for one or more Plan Years and thereafter ceases to be top-heavy, the provisions of this Article shall cease to apply to the Plan effective as of the Determination Date on which it is determined no longer to be top-heavy. XX.5 Effect of Article. Notwithstanding anything contained herein to the contrary, the provisions of this Article shall automatically become inoperative and of no effect to the extent not required by the Code or the Act. XX-4 EXECUTED this ____ day of December, 1997. NGC CORPORATION By: ----------------------------- CG TRUST COMPANY, TRUSTEE By: ----------------------------- NGC PROFIT SHARING/401(K) SAVINGS PLAN APPENDIX A WITHDRAWALS FROM TRIDENT ACCOUNTS. --------------------------------- (a) A Member who is an Employee and who has made all available withdrawals under Section 11.1(a) of the Plan, may withdraw any or all amounts in his Trident Rollover Account. (b) A Member who has attained age fifty-nine and one-half and who has made all available withdrawals pursuant to Section 11.1(a) of the Plan and Paragraph (a) above may withdraw from his Trident Before-Tax Account an amount not exceeding the then value of such Account. (c) A Member who is an Employee and who has made all available withdrawals under Section 11.1(a) of the Plan and Paragraphs (a) and (b) above may above may withdraw from his Trident Matching Account any or all amounts held in such Account that have been so held for twenty-four months or more. A Member (other than a Member who has attained age 59 1/2 at the time the withdrawal is requested and who withdraws the entire balance of his Trident Before-Tax Account and his Trident Matching Account) who makes a withdrawal under this Paragraph may not make Before-Tax Contributions to the Plan for a period of six months following the date of such withdrawal. (d) Not more than one withdrawal pursuant to the provisions of this Appendix A shall be made in any twelve month period; provided, however, that withdrawals may be made under Paragraphs (a), (b), and (c) above, in accordance with the ordering rules therein, simultaneously. (e) Except as provided in Paragraphs (b) and (d) above, all withdrawals pursuant to the provisions of this Appendix A shall be subject to the restrictions provided in Section 11.2 of the Plan. A-1 NGC PROFIT SHARING/401(K) SAVINGS PLAN APPENDIX B WITHDRAWALS FROM DESTEC ACCOUNTS. -------------------------------- (a) A Member who has attained age fifty-nine and one-half may withdraw from his Destec Before-Tax Account an amount not exceeding the then value of such Account. A withdrawal by a Member pursuant to the provisions of this Paragraph may not be for an amount less than $1,000.00. (b) A Member may withdraw his entire Destec Before-Tax Account upon: (1) the termination of the Plan without the establishment or maintenance of another defined contribution plan (other than an employee stock ownership plan as defined in section 4975(e)(7) of the Code); (2) the disposition, to an entity which is not a Controlled Entity, of substantially all of the assets used by the Employer in the trade or business in which the Member continues employment, following which the Employer continues to maintain the Plan; or (3) the disposition, to an entity which is not a Controlled Entity, of the Employer's interest in a subsidiary in which the Member continues employment, following which the Employer continues to maintain the Plan; provided that any such withdrawal shall constitute a lump sum distribution of the balance to the Member's credit in his Destec Before-Tax Account under section 402(d)(4) of the Code (without regard to clauses (i), (ii), (iii), and (iv) of section 402(d)(4)(A) of the Code or to sections 402(d)(4)(B) and (F) of the Code). (c) A Member who terminated employment with the Employer after attaining age fifty, the occurrence of whose Annuity Starting Date is not prohibited by Section 10.1(e) of the Plan, may withdraw from his Destec Accounts an amount not exceeding the then value of such Accounts. An eligible Member may make no more than one withdrawal pursuant to the provisions of this Paragraph in any Plan Year. (d) Except as provided in Paragraph (c) above, all withdrawals pursuant to the provisions of this Appendix B shall be subject to the restrictions provided in Section 11.2 of the Plan. B-1 NGC PROFIT SHARING/401(K) SAVINGS PLAN APPENDIX C 1. INVESTMENT OF DOW ESOP ACCOUNT. (a) General Rule. Except as otherwise provided in subsection (b), the Members' Dow ESOP Accounts shall be invested primarily in Dow Stock. (b) Diversification of Investment. A Member may from time to time designate that his existing Dow ESOP Account balance be reinvested, in the same manner, and subject to the same restrictions, as applicable to the reinvestment of other Accounts under Section 5.2; provided, however, that at least three (3) Investment Funds, not inconsistent with the Treasury regulations under section 401(a)(28)(B)(ii)(II) of the Code, shall be available for such purpose; provided further, that the amount so reinvested shall be transferred from the Member's Dow ESOP Account to his Dow Transfer Account. (c) Voting Rights. A Member or beneficiary shall be entitled to direct the Trustee as to the manner in which any rights, including, but not limited to, voting rights, are to be exercised with respect to the whole shares of Dow Stock allocated to such Member's Dow ESOP Account, if such Dow Stock is part of a registration-type class of securities as defined in section 409(e)(4) of the Code. To the extent permitted by section 404(a) of the Act, fractional shares from all such Accounts shall be combined and voted by the Trustee on each issue in the same ratio as the allocated shares are voted. Unless otherwise required by applicable law, the Trustee shall not exercise voting rights with respect to Dow Stock allocated to a Member's Dow ESOP Account which such Member fails to exercise. At the time of mailing the notice for each shareholder's meeting, the Company shall furnish each such Member or beneficiary with proxy solicitation material and any other information which the issuer of the Dow Stock distributes to shareholders regarding the exercise of voting or other rights, together with a voting instruction form to be returned by the Member or beneficiary to the Trustee. If the Dow ESOP Accounts are not invested in a registration-type class of securities as defined in section 409(e)(4) of the Code, a Member or beneficiary shall be entitled to direct the Trustee as to the manner in which voting rights will be exercised with respect to any corporate matter which involves the voting of such shares allocated to the Member's Dow ESOP Account with respect to the approval or disapproval or any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such similar transaction as may be prescribed in Treasury regulations under section 409(e) of the Code. 2. DIVIDENDS ON DOW STOCK. All dividends paid with respect to Dow Stock held by the Trust shall be credited to Members' Dow ESOP Accounts and shall be reinvested as soon as practicable in Dow Stock. C-1 3. DOW ESOP ACCOUNT VALUATION. If and to the extent that the Dow ESOP Accounts are invested in securities which are not readily tradable on an established securities market, the valuation thereof for purposes of the Plan shall be made by an independent appraiser meeting requirements similar to those contained in Treasury regulations under section 170(a)(1) of the Code. 4. WITHDRAWALS FROM DOW ESOP ACCOUNT. A Member who is an Employee may withdraw all or a portion of his Dow ESOP Account, in integral multiples of 10% of the value of such Account. All withdrawals pursuant to the provisions of this paragraph shall be made in accordance with the procedures established from time to time by the Committee. Payment of the withdrawal shall be made as soon as administratively feasible after the date a Member completes such procedures and shall be made in Dow Stock unless such Member elects to have all or a portion of such payment made in cash. C-2 EX-10.43 9 1ST AMENDMENT TO NGC PROFIT SHARING PLAN EXHIBIT 10.43 FIRST AMENDMENT TO NGC PROFIT SHARING/401(k) SAVINGS PLAN WHEREAS, NGC CORPORATION (the "Company") and other Employers have heretofore adopted the NGC PROFIT SHARING/401(k) SAVINGS PLAN (the "Plan") for the benefit of their eligible employees; and WHEREAS, the Company amended and restated the Plan on behalf of itself and the other Employers, effective as of January 1, 1998; and WHEREAS, the Company desires to further amend the Plan on behalf of itself and the other Employers; NOW, THEREFORE, the Plan shall be amended as follows, effective as of January 1, 1998: 1. The fourth and fifth paragraphs on page (i) of the Plan shall be deleted and the following shall be substituted therefor: "WHEREAS, the Company desires to restate the Plan and to amend the Plan in several respects, intending thereby to provide an uninterrupted and continuing program of benefits; NOW THEREFORE, the Plan is hereby restated in its entirety as follows with no interruption in time, effective as of January 1, 1998, except as otherwise indicated herein:" 2. The parenthetical "(but excluding overtime payments and bonuses)" shall be deleted from Paragraph (12) of Section 1.1 of the Plan, and the parenthetical "(but excluding (i) overtime payments that are made with respect to overtime that is not regularly scheduled overtime and (ii) bonuses)" shall be substituted therefor. 3. Paragraphs (64), (65) and (66) of Section 1.1 of the Plan shall be deleted and the following shall be substituted therefor: "(64) TRUST: The trust(s) established under the Trust Agreement(s) to hold and invest contributions made under the Plan and income thereon, and from which the Plan benefits are distributed. (64A) TRUST AGREEMENT: The agreement(s) entered into between the Company and the Trustee establishing the Trust, as such agreement(s) may be amended from time to time. (65) TRUST FUND: The funds and properties held pursuant to the provisions of the Trust Agreement for the use and benefit of the Members, together with all income, profits, and increments thereto. (66) TRUSTEE: The trustee or trustees qualified and acting under the Trust Agreement at any time." 4. The second sentence of Section 5.3 of the Plan shall be deleted and the following shall be substituted therefor: "During such period, amounts that would otherwise be invested in Company Stock or other Company securities pursuant to Section 5.1 or an investment designation shall be invested in such other assets as the Committee may in its discretion determine, or the Trustee may hold such amounts uninvested for a reasonable period pending the purchase of such stock or securities." 5. The second sentence of Section 5.5 of the Plan shall be deleted and the following shall be substituted therefor: "The Committee, in its discretion, may exercise or sell any such rights or privileges and shall direct the Trustee with respect to such matters." 6. Section 13.6(k) of the Plan shall be deleted and the following shall be substituted therefor: "(k) To direct the Trustee pursuant to the provisions of the Trust Agreement and with respect to the matters described in Sections 5.3, 5.4 and 5.5;" 7. Article XIV of the Plan shall be deleted and the following shall be substituted therefor: "XIV. TRUSTEE AND ADMINISTRATION OF TRUST FUND ---------------------------------------- As a means of administering the assets of the Plan, the Company has entered into a Trust Agreement with CG Trust Company as Trustee. The administration of the assets of the Plan and the duties, obligations, and responsibilities of the Trustee shall be governed by the Trust Agreement. The Trust Agreement may be amended from time to time as the Company and the Trustee deem advisable in order to effectuate the purposes of the Plan. The Trust Agreement is incorporated herein by reference and thereby made a part of the Plan." 8. The second sentence of Section 19.8 of the Plan shall be deleted and the following shall be substituted therefor: "All provisions of the Plan shall be construed in accordance with the laws of Texas except to the extent preempted by federal law." 9. As amended hereby, the Plan is specifically ratified and reaffirmed. IN WITNESS WHEREOF, the undersigned has caused these presents to be executed this ___ day of ________________________, 1998. 2 NGC CORPORATION CG TRUST COMPANY, TRUSTEE BY: BY: ------------------------- -------------------------- NAME: NAME: ----------------------- ------------------------ TITLE: TITLE: ---------------------- ----------------------- 3 EX-10.44 10 2ND AMENDMENT TO NGC PROFIT SHARING PLAN EXHIBIT 10.44 SECOND AMENDMENT TO NGC PROFIT SHARING/401(k) SAVINGS PLAN WHEREAS, Dynegy Inc., formerly known as NGC Corporation (the "Company"), and other Employers have heretofore adopted the NGC Profit Sharing/401(k) Savings Plan (the "Plan") for the benefit of their eligible employees; and WHEREAS, the Company amended and restated the Plan on behalf of itself and the other Employers, effective as of January 1, 1998; and WHEREAS, the Company desires to further amend the Plan on behalf of itself and the other Employers; NOW, THEREFORE, the Plan shall be amended as follows: I. Effective as of July 6, 1998: 1. All references in the Plan to "NGC Corporation" shall be changed to references to "Dynegy Inc." 2. All references in the Plan to the "NGC Profit Sharing/401(k) Savings Plan" shall be changed to references to the "Dynegy Inc. Profit Sharing/401(k) Savings Plan." II. Effective as of November 1, 1998, the following sentence shall be added to the end of Section 1.1(12) of the Plan: "Notwithstanding any provision in this Section 1.1(12) to the contrary, the Compensation of any Member who is employed by Dynegy Crude Gathering and Marketing, Inc. (formerly NGC Oil Trading and Transportation, Inc.) shall, for all purposes under the Plan, include monthly premium pay that is paid to or for the benefit of such Member in connection with the anticipated sale of such company for services rendered or labor performed for such company while a Member and an Eligible Employee." III. Effective as of January 1, 1999: 1. The phrase "the Member's elections to defer Compensation" in Section 1.1(6) of the Plan shall be deleted and the phrase "the Member's elections to defer Compensation and Overtime Payments" shall be substituted therefor. 2. The parenthetical "(but excluding (i) overtime payments that are made with respect to overtime that is not regularly scheduled overtime and (ii) bonuses)" shall be deleted from Section 1.1(12) of the Plan, and the parenthetical "(but (i) including overtime payments that are made with respect to overtime that is regularly scheduled overtime and (ii) excluding Overtime Payments and bonuses)" shall be substituted therefor. 3. The phrase "The Compensation of any Member" at the beginning of Section 1.1(12)(B) of the Plan shall be deleted and the phrase "The Compensation and Overtime Payments of any Member" shall be substituted therefor. 4. The following new Paragraph (46A) shall be added immediately following Section 1.1(46) of the Plan: "(46A) OVERTIME PAYMENT: Any payment made by the Employer to or for the benefit of a Member for services rendered or labor performed for the Employer while a Member and an Eligible Employee that is classified by the Employer as a payment for overtime (other than regularly scheduled overtime)." 5. The phrase "defer Compensation hereunder" in Section 2.1(c) of the Plan shall be deleted and the phrase "defer Compensation or Overtime Payments hereunder" shall be substituted therefor. 6. The following new provision shall be added immediately following Paragraph (a) of Section 3.1 of the Plan: "A Member who makes an election to defer an integral percentage of his Compensation pursuant to this Paragraph (a) for a Plan Year, may, prior to the first day of such Plan Year, make a separate election, applicable only to such Plan Year, to defer the same integral percentage of any Overtime Payments received during such Plan Year by having the Employer contribute the amount so deferred to the Plan. Overtime Payments not so deferred by such election shall be received by such Member in cash. A Member's election to defer an amount of his Overtime Payments pursuant to this Section shall be made by authorizing his Employer, in the manner prescribed by the Committee, to reduce his Overtime Payments in the elected amount and the Employer, in consideration thereof, agrees to contribute an equal amount to the Plan. The reduction in a Member's Overtime Payments during a Plan Year pursuant to his election hereunder shall be effected by reducing such Overtime Payments as of each payroll period in which such Member receives Overtime Payments within such Plan Year following the effective date of such election. The amount of Overtime Payments elected to be deferred by a Member for a Plan Year pursuant to this Section shall become a part of the Employer's Before-Tax Contributions for such Plan Year." 7. Paragraphs (b) and (c) of Section 3.1 of the Plan shall be deleted and the following shall be substituted therefor: "(b) A Member's Compensation reduction election shall remain in force and effect for all periods following its effective date until modified or terminated or until such Member ceases to be an Eligible Employee. A Member's Overtime Payment deferral election shall remain in force and effect for the Plan Year to which it relates until modified as described in this Paragraph, terminated as described in Paragraph (c), or such Member ceases to be an Eligible Employee. A Member who has elected to defer a portion of his Compensation may change his deferral election percentage (within the percentage limits set forth in Paragraph (a) above), effective as of the first of any calendar month, by electing a new Compensation reduction percentage (which new reduction percentage shall also apply to his election, if any, to defer Overtime Payments) in the manner and within the time period prescribed by the Committee. 2 (c) A Member may cancel his Compensation reduction election, together with his Overtime Payments reduction election if applicable, effective as of the first day of any calendar month, in accordance with the procedures and within the time period prescribed by the Committee. A Member who so cancels his Compensation reduction election, together with his Overtime Payments reduction election if applicable, may resume Compensation deferrals, effective as of the first day of any calendar month (provided such Member is an Eligible Employee), by making a new Compensation reduction election in the manner and within the time period prescribed by the Committee. If such an election to resume Compensation deferrals is to become effective during the same Plan Year in which a Member's Overtime Payment reduction election has been canceled pursuant to this Paragraph, then such Member shall also resume Overtime Payment deferrals based upon the same deferral percentage elected with respect to his Compensation deferrals." 8. The phrase "the Compensation deferral elections" in Sections 3.1(f) and 4.5(e) of the Plan shall be deleted and the phrase "the Compensation and Overtime Payment deferral elections" shall be substituted therefor. 9. The phrase "Compensation elected to be deferred," in Section 3.1(g) of the Plan shall be deleted and the phrase "Compensation and Overtime Payments elected to be deferred," shall be substituted therefor. 10. The first sentence of Section 3.2 of the Plan shall be deleted and the following shall be substituted therefor: "For each calendar month, the Employer shall contribute to the Trust, as Employer Matching Contributions, an amount that equals 100% of that portion of the Before-Tax Contributions attributable only to Compensation deferral elections that were made pursuant to Section 3.1 on behalf of each of the Members during such month and that were not in excess of 5% of each such Member's Compensation for such month." IV. Subject to and conditioned upon receipt of a determination by the Internal Revenue Service that the following amendments to the Plan do not adversely affect the qualified status of the Plan under sections 401 et seq. and 501 of the Internal Revenue Code of 1986, as amended, the following amendments shall be effective as soon as administratively feasible after receipt of such a determination: 1. Paragraph (b) of Section 11.1 of the Plan shall be changed to Paragraph (c) and the following new Paragraph (b) shall be added to Section 11.1 of the Plan: "(b) A Member who has attained age fifty-nine and one-half may withdraw from his After-Tax Account, Before-Tax Account, and Rollover Contribution Account an amount not exceeding the then value of such Accounts. Such withdrawal shall come, first, from the Member's After-Tax Account, second, from his Rollover Contribution Account, and, third, from his Before-Tax Account." 2. The reference to "Paragraph (a)" in the first sentence of Section 11.1(c) of the Plan shall be deleted, and a reference to "the Paragraphs" shall be substituted therefor. 3 3. Paragraph (b) of Section 11.2 of the Plan shall be deleted and the following shall be substituted therefor: "(b) Notwithstanding the provisions of this Article, (i) not more than one withdrawal pursuant to Section 11.1(a) shall be made in any one calendar quarter, (ii) not more than one withdrawal pursuant to Section 11.1(b) shall be made in any one Plan Year, and (iii) no withdrawal shall be made from an Account to the extent such Account has been pledged to secure a loan from the Plan." V. As amended hereby, the Plan is specifically ratified and reaffirmed. IN WITNESS WHEREOF, the undersigned has caused these presents to be executed this _____ day of December, 1998. DYNEGY INC. BY: ------------------------------- NAME: ------------------------- TITLE: ------------------------ 4 EX-12.1 11 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1
DYNEGY INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($ in 000'S) - ----------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- --------- -------- -------- -------- Computation of Earnings: Pre-tax income (loss) from continuing operations $158,691 $(149,895) $169,645 $ 65,234 $ 44,105 Undistributed income from equity investees 6,477 4,073 21,729 9,169 3,803 -------- --------- -------- -------- -------- Computed Earnings (Loss) 152,214 (153,968) 147,916 56,065 40,302 -------- --------- -------- -------- -------- Fixed Charges: Interest costs: Expensed 74,992 63,455 46,202 34,475 1,114 Capitalized 7,591 8,800 1,200 1,028 - Minority interest in income of a subsidiary 16,632 9,841 - - - Amortization of financing costs 1,320 943 772 1,132 1,267 Amortization of Premium (2,568) (6,768) (4,892) (3,216) - Rental expense representative of interest factor 20,698 13,572 4,171 3,719 955 -------- --------- -------- -------- -------- Total Fixed Charges 118,665 89,843 47,453 37,138 3,336 -------- --------- -------- -------- -------- Earnings Before Income Taxes and Fixed Charges $263,288 $ (72,925) $194,169 $ 92,175 $ 43,638 ======== ========= ======== ======== ======== Ratio of Earnings to Fixed Charges 2.22 (a) 4.09 2.48 13.08 ======== ========= ======== ======== ======== (a) Earnings are inadequate to cover fixed charges for the year ended December 31, 1997, by approximately $72.9 million.
EX-22.1 12 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 22.1 SUBSIDIARIES OF DYNEGY INC. STATE OR JURISDICTION OF INCORPORATION SUBSIDIARY OR FORMATION - ---------- ---------------------- 1. Dynegy Power Corp. Delaware 2. Dynegy Global Energy, Inc. Delaware 3. DMT Holdings, Inc. Delaware 4. Dynegy GP Inc. Delaware 5. Dynegy Midstream, Inc. Delaware 6. Dynegy Regulated Holdings, Inc. Delaware 7. Dynegy Upper Holdings, LLC Delaware 8. Dynegy Administrative Services Company Delaware EX-23.1 13 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 24, 1999, included in this Form 10-K, into Dynegy Inc.'s previously filed registration statements of Form S-8 (File Nos. 33-75044, 33-96394 and 333-20773) and Form S-3 (File Nos. 333-12987 and 333-60253). /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Houston, Texas March 26, 1999 EX-27 14 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 DEC-31-1998 DEC-31-1997 28,367 23,047 0 0 1,623,738 1,675,772 0 0 149,901 136,485 2,117,241 2,018,780 2,446,878 1,958,250 (514,771) (436,674) 5,264,237 4,516,903 (2,026,323) (1,753,094) 0 0 0 0 (75,418) (75,418) (1,533) (1,518) (1,051,112) (1,017,607) (5,264,237) (4,516,903) (14,257,997) (13,378,380) (14,257,997) (13,378,380) 13,829,310 12,993,086 13,829,310 12,993,086 7,677 20,230 0 0 74,992 63,455 (158,691) 149,895 50,338 (62,210) (108,353) 87,685 0 0 0 0 0 14,800 (108,353) 102,485 0.71 (0.68) 0.66 0
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