-----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, O9HbFOFsWaDLYOkRs/N0q0H1x4thBeGhpxZKX4ZfeoaL69yjpyd1STbrcjk/lLwo GrcdQv+NKCC52s0NHORgMA== 0000950129-00-000900.txt : 20000307 0000950129-00-000900.hdr.sgml : 20000307 ACCESSION NUMBER: 0000950129-00-000900 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNEGY INC /IL/ CENTRAL INDEX KEY: 0000879215 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 742928353 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-15659 FILM NUMBER: 559277 BUSINESS ADDRESS: STREET 1: 1000 LOUISIANA STREET 2: STE 5800 CITY: HOUSTON STATE: TX ZIP: 62521 BUSINESS PHONE: 7133677600 MAIL ADDRESS: STREET 1: 1000 LOUISIANA STREET 2: SUITE 5800 CITY: HOUSTON STATE: TX ZIP: 62521 FORMER COMPANY: FORMER CONFORMED NAME: DYNEGY INC DATE OF NAME CHANGE: 19980717 FORMER COMPANY: FORMER CONFORMED NAME: TRIDENT NGL HOLDING INC DATE OF NAME CHANGE: 19930916 10-K405 1 DYNEGY INC. - DATED DECEMBER 31, 1999 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _____________ COMMISSION FILE NUMBER: 1-11156 DYNEGY INC. (Exact name of registrant as specified in its charter) Illinois 74-2928353 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1000 Louisiana, Suite 5800 Houston, Texas 77002 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 507-6400 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of each exchange on which registered: Class A Common Stock, no par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Title of each class: Name of each exchange on which registered: Series A Convertible Preferred Stock ---
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes X No --- --- The aggregate value of Class A Common Stock held by non-affiliates of the registrant was approximately $4,222,087,213 on February 28, 2000, (based on $44.8125 per share, the last sale price of the Common Stock as reported on the New York Stock Exchange Composite Tape on such date). 99,066,639 shares of the registrant's Class A Common Stock and 40,521,250 shares of the registrant's Class B Common Stock were outstanding as of February 28, 2000. DOCUMENTS INCORPORATED BY REFERENCE. Portions of Parts I, II and IV in the Annual Report to Shareholders for the fiscal year ended December 31, 1999. As to Part III (items 10, 11, 12 and 13), Notice and Proxy Statement for the 2000 Annual Meeting of Stockholders to be filed not later than 120 days after December 31, 1999. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] ================================================================================ 2 DYNEGY INC. FORM 10-K TABLE OF CONTENTS
PAGE PART I Item 1. Business.............................................................................. 1 Item 1A. Executive Officers.................................................................... 18 Item 2. Properties............................................................................ 20 Item 3. Legal Proceedings..................................................................... 24 Item 4. Submission of Matters to a Vote of Security Holders................................... 27 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............. 27 Item 6. Selected Financial Data............................................................... 29 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................ 30 Item 8. Financial Statements and Supplementary Data........................................... 48 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................................ 48 PART III Item 10. Directors and Executive Officers of the Registrant.................................... 48 Item 11. Executive Compensation................................................................ 49 Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 49 Item 13. Certain Relationships and Related Transactions........................................ 49 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 49 Signatures...................................................................................... 56
For definitions of certain terms used herein, see "Item 1. BUSINESS -- DEFINITIONS." 3 PART I ITEM 1. BUSINESS THE COMPANY Dynegy Inc. ("Dynegy" or the "Company") is a leading provider of energy products and services in North America, the United Kingdom and in continental Europe. Products marketed by the Company's wholesale marketing operations include natural gas, electricity, coal, emissions, natural gas liquids, crude oil, liquid petroleum gas and related services. The Company's wholesale marketing operations are supported by ownership or control of an extensive asset base and transportation network that includes unregulated power generation, gas and liquids storage capacity, gas, power and liquids transportation capacity and gas gathering, processing and fractionation assets. Dynegy's asset base is further broadened by the acquisition of Illinova Corporation ("Illinova"), providing significant fossil-fuel merchant generation capacity and a regional electric and natural gas utility engaged in the transmission, distribution and sale of electricity and natural gas. The critical mass achieved through the combination of a large scale energy marketing operation with strategically located assets which augment the marketing efforts affords the Company the ability to offer innovative, value-creating energy solutions to its customers. The Company is a holding company that conducts substantially all of its business through its subsidiaries. From inception of operations in 1984 until 1990, Natural Gas Clearinghouse ("Clearinghouse") limited its activities primarily to natural gas marketing. Starting in 1990, Clearinghouse began expanding its core business operations through acquisitions and strategic alliances resulting in the formation of a midstream energy asset business and establishing energy marketing operations in both Canada and the United Kingdom. The Company initiated electric power marketing operations in February 1994 in order to exploit opportunities created by the deregulation of the domestic electric power industry. Effective March 1, 1995, Clearinghouse and Trident NGL Holding, Inc. ("Holding"), a fully integrated natural gas liquids company, merged ("Trident Combination") and the combined entity was renamed NGC Corporation ("NGC"). On August 31, 1996, NGC completed a strategic combination with Chevron U.S.A. Inc. and certain Chevron affiliates (collectively "Chevron") whereby substantially all of Chevron's midstream assets merged with NGC ("Chevron Combination"). Effective July 1, 1997, NGC acquired Destec Energy, Inc. ("Destec Acquisition"), a leading independent power producer. During 1998, the Company changed its name to Dynegy Inc. in order to reflect its evolution from a natural gas marketing company to an energy services company capable of meeting the growing demands and diverse challenges of the dynamic energy market of the 21st Century. On June 14, 1999, Dynegy and Illinova announced the execution of definitive agreements for the merger of Illinova and Dynegy. The merger transaction was closed on February 1, 2000. The principal executive office of the Company is located at 1000 Louisiana, Suite 5800, Houston, Texas 77002, and the telephone number of that office is (713) 507-6400. Dynegy and its affiliates maintain marketing and/or regional offices in Atlanta, Georgia; Boston, Massachusetts; Calgary, Alberta; Chicago, Illinois; Dallas, Texas; Decatur, Illinois; Englewood, Colorado; London, England; Midland, Texas; Montreal, Quebec; Oakville, Ontario; Oklahoma City, Oklahoma; Pleasanton, California; Tampa, Florida; Tulsa, Oklahoma; and Washington D.C. DEFINITIONS As used in this Form 10-K, the abbreviations listed below are defined as follows: Bbl 42 U.S. gallons, the basic unit for measuring crude oil and natural gas condensate. MBbls/d Volume of one thousand barrels per day. MMBbls Volume of one million barrels. MMcf/d Volume of one million cubic feet per day. Bcf Volume of one billion cubic feet. Bcf/d Volume of one billion cubic feet per day. Btu British Thermal Unit - a measure of the amount of heat required to raise the temperature of one pound of water one degree Fahrenheit. Bpd Barrels per day. NGLs Natural gas liquids. LPG Liquid petroleum gas. MW Megawatts. Spot The Henry Hub cash price posting for natural gas per the "Inside FERC" publication. 1 4 BUSINESS THE ACQUISITION OF ILLINOVA CORPORATION Dynegy completed its acquisition of Illinova Corporation early in the first quarter 2000. Illinova, headquartered in Decatur, Illinois, was an energy services holding company with 1999 annual revenues of $2.4 billion. Illinova's four principal operating subsidiaries were: o Illinois Power Company, an electric and natural gas utility engaged in the transmission, distribution and sale of electricity and natural gas, serving approximately 650,000 customers over a 15,000 square-mile area of Illinois; o Illinova Power Marketing, Inc., a subsidiary engaged in the ownership and operation of unregulated fossil-fueled electric generation in Illinois; o Illinova Generating, Inc., a subsidiary that invests in, develops and operates independent power projects worldwide; and o Illinova Energy Partners, Inc., a subsidiary that markets energy and energy-related services in the United States and Canada. Dynegy believes the acquisition of Illinova provides significant financial, operational and corporate governance advantages that enhance its position as a leading provider of energy services and products. The combination brings together a strong, innovative utility company owning strategically located generation assets and operations, including electric transmission and retail distribution capabilities, with one of the leading North American energy marketers and independent power producers. These two companies have diverse but complementary operations, providing qualitative and quantitative expansion of Dynegy's electric generation capacity, while enhancing Dynegy's access to dependable cash flow and an improved platform for further expansion. Factors considered in evaluating the benefits of the merger included: o The merger is expected to be accretive to the earnings per share of the Dynegy shareholders. o The addition of Illinova's traditional utility business is expected to provide a stable base of cash flow from which the combined company will be able to leverage its business strategy; o The merger provides Dynegy with a larger platform in the electricity trading market from which it can expand its marketing operations. This larger platform is expected to provide the foundation for Dynegy's strategy to be at the forefront of the restructuring of the power industry and the convergence of the gas and electricity industries; o The merger adds an additional 4,989 gross megawatts of electricity generating capacity to Dynegy's current capacity of 7,238 gross megawatts per year (both figures include current capacity as well as capacity under construction). This additional capacity is in the Midwestern United States and is expected to allow Dynegy to sell more electricity for its own account on better terms throughout the North American market; o The merger is expected to provide continuing shareholders, who desire to invest in a full-service provider of energy products and services, an investment vehicle having the flexibility and resources required to respond to the numerous opportunities in the energy industry; o The merger provides the liquidity needed to allow certain Dynegy shareholders to reduce the size of their investment in Dynegy; and o The merger improves public float thereby enhancing the Company's access to equity capital at attractive cost. Segment Discussion In 1999, the Company reported its operations under two primary business segments: the Energy Convergence and Midstream segments. As previously disclosed herein, in 2000 the Company will add a third business segment consisting of the regulated utility operations, operating under Illinois Power Company, acquired in the Illinova acquisition. This segment will be referred to as the Transmission and Distribution segment. A general description of the business strategy employed by each segment is followed by a discussion of each segment's component businesses. 2 5 [GRAPH] ENERGY CONVERGENCE SEGMENT This segment is actively engaged in value creation through marketing and trading of natural gas, power, coal, emissions and the generation of electricity principally under the name Dynegy Marketing and Trade. Dynegy is pursuing an integrated wholesale energy business approach based on execution of an energy convergence strategy. This strategy exploits the marketing, trading and arbitrage opportunities existing in the natural gas and power markets that are enhanced by the control and optimization of related physical assets. The combination of a portfolio of strategic generation assets and a national gas and power marketing franchise allow for extraction of value resulting from arbitrage opportunities occurring across energy products, across geographic regions and over time. The Company refers to this synergistic relationship between merchant generation capacity and energy trading and marketing as the "Merchant Leverage Effect" depicted below. [GRAPH] Dynegy views its gas and power marketing and power generation businesses as an integrated unit. Ownership or control of merchant generation, or "Btu Conversion" capacity, when coupled with the Company's national wholesale gas and power marketing franchise, creates a wide range of value creation opportunities benefiting both the Company and its customers. Dynegy's wholesale trading and marketing franchise adds value to 3 6 its generation assets by providing national market access, market infrastructure and intelligence, risk management and arbitrage opportunities, fuel management and procurement expertise and transmission expertise for inputs (gas and coal) and outputs (power). Generation capacity adds value to the company's wholesale trading and marketing franchise by providing an outlet/market for gas and coal supplies, a source of reliable power supply and an enhanced ability to structure innovative new products and services for customers. Concurrent with the restructuring of the U.S. Wholesale electricity markets, Dynegy is continuing its focus on building a portfolio of merchant generation capacity in select markets across the country. Dynegy believes that merchant generation capacity, which is designed principally to supply power to markets during periods of peak demand, offers the greatest flexibility in executing its strategy of an integrated gas and power marketing and power generation business. For the foreseeable future, Dynegy will continue to expand its ownership or commercial control over strategic generation assets/capacity in selected markets through acquisitions, greenfield development and asset management agreements. The aforementioned acquisition of Illinova's unregulated fossil-fuel generation complements this strategy both in terms of strategic location and capacity. It is expected that approximately two-thirds of projected capital expenditures over the next three years will be directed to the control or ownership of generation assets designed to maximize value extraction through execution of the Merchant Leverage Effect. [GRAPH] Deregulation of the retail gas and power markets is also evolving to encourage greater competition and access to markets. Dynegy's retail gas and electric strategy is designed to access a significant national customer base while mitigating the large capital investment and financial risks necessitated by other national retail marketing strategies. Rather than competing directly with its existing wholesale customers, Dynegy has chosen to strengthen key customer relationships by forming a number of regional retail gas alliances. The combination of Dynegy's low-cost energy supply (gas and power) with a regional utility's large, installed customer base and local name recognition positions each alliance to capture a significant portion of the local gas and power market, when those markets fully open to competition. Dynegy refers to this as the "Incumbent Advantage." Dynegy's goal is to form a North American network of regional retail energy alliances. In addition, Illinova Power Company and Illinova Energy Partners, Inc. each have varying levels of retail gas and electric operations. The Illinova retail operations include three distinct strategies: commercial & industrial and retail commodity sales and services; non-commodity energy related products and services; and, energy information software products. Dynegy is assessing the strategic fit of these operations in concert with its current retail strategy for the purpose of defining a coherent retail strategy for the future. These combined operations are being managed under the name Dynegy Energy Services. The integration of Illinova's retail operations along with Dynegy's established strategy will accelerate Dynegy's penetration of the retail gas and electric markets while reducing financial risk during this period of regulatory uncertainty and restructuring. The following chart provides geographic data on existing and targeted alliance markets. 4 7 [GRAPH] Dynegy's vision of the ultimate restructuring of the gas and power marketing and power generation businesses in the united states is expected to be replicated throughout Canada, the United Kingdom, Europe and other markets as those markets open up to greater competition, subject to any unique attributes associated with market deregulation in those areas. The company maintains energy trading operations in Canada, the UK and europe and is continuing to assess local, regional and national markets, regulatory environments and other factors in order to support and direct future economic investment. MIDSTREAM SEGMENT Since 1997, the midstream natural gas liquids industry has experienced significant upheaval. Volatility in NGL prices from 1997 through 1999 has placed significant pressure on operating margins within the industry. Despite significant consolidation over the recent past, the domestic midstream industry remains relatively fragmented and competition for additional inlet volumes remains intense. Dynegy, along with other industry participants, has responded to these industry conditions by aggressively reducing costs, rationalizing assets in non-core operating areas and improving its competitive position in core operating areas through asset consolidation and alliances. The principal goal of these efforts is to mitigate the variability of earnings and cash flow caused by fluctuations in commodity prices, while gaining and maintaining first quartile operating performance against industry peers. From 1998 through early 2000, the Company disposed of certain non-core assets, principally in the Mid-Continent region, combined regional operations through an alliance with an industry partner and consolidated certain upstream and downstream operations to achieve cost synergies. These efforts resulted in first quartile operating performance in 1999, positioning the Company to concentrate its operations and capital expenditure program in the strategic gulf coast area and any other areas that management views as strategic. Dynegy believes that financial returns will benefit from focusing its management and capital resources towards expanding upstream and downstream opportunities arising as Gulf of Mexico natural gas production increases, as world-wide liquids marketing activities become further linked to the industry-wide southern Texas and Louisiana infrastructure and as other developments in the natural gas industry arise, which complement the Company's strategy. 5 8 [GRAPH] This segment principally operates under the name Dynegy Midstream Services and consists of the North American midstream liquids operations, the global liquefied petroleum gas transportation and the natural gas liquids marketing operations, located primarily in Houston and in London, and certain other businesses. The North American midstream liquids operations are actively engaged in the gathering and processing of natural gas and the transportation, fractionation and storage of NGLs. Major producers upstream and refiners downstream have divested their ownership in midstream assets and operations over the last decade. Traditionally, these operations provided intermediate service and support functions within most integrated petroleum companies. Dynegy believes that it can achieve significant cost and operating efficiencies as well as attractive returns on services provided to the market from the independent ownership and operation of these assets. Dynegy captures value throughout the midstream service business model as shown below. As a result, Dynegy has built a vertically integrated natural gas liquids infrastructure having the capability of extracting profit throughout the value chain extending from inlet natural gas volumes gathered from producing horizons throughout the US and Canada to marketing NGLs to wholesalers and end-users throughout the world. [GRAPH] 6 9 The Company is a recognized industry leader in substantially all midstream component businesses, ranging from natural gas processing to marketing NGLs to end users. During 1999, Dynegy was the second largest processor of natural gas in the United States; it owned substantial fractionation capacity exceeding three hundred thousand barrels per day and the Company marketed over four hundred fifty thousand barrels of NGLs daily. These activities were supported by an extensive storage and transportation system, which included in excess of 14,000 miles of natural gas pipelines, 2,000 miles of crude oil pipelines, 500 miles of NGL pipelines and 60 million barrels of NGL storage capacity. To further assist its operations, the Company has access to substantial barge, rail, trucking and terminalling assets as well as large-hull ships having long-haul capabilities, which enhance international trading opportunities. As discussed elsewhere, the Company is disposing of its Mid-Continent natural gas processing and gathering assets during the first quarter 2000. OVERVIEW OF SEGMENT BUSINESSES ENERGY CONVERGENCE SEGMENT - NATURAL GAS The Company's wholesale natural gas marketing activities are conducted throughout North America and in the United Kingdom. These activities consist of contracting to purchase specific volumes of natural gas from suppliers at various points of receipt to be supplied over a specific period of time; aggregating natural gas supplies and arranging for the transportation of these gas supplies through proprietary and third-party transmission systems; negotiating the sale of specific volumes of natural gas over a specific period of time to local distribution companies (LDCs), utilities, power plants and other end-users; and matching natural gas receipts and deliveries based on volumes required by customers. NATURAL GAS PURCHASES. The Company purchases natural gas from a variety of suppliers under contracts with varying terms and conditions intended to ensure a stable supply of natural gas. When purchasing natural gas, the Company considers price, location, liquids content, if applicable, and quantities available. In 1999, the Company purchased natural gas in every major producing basin in the United States and Canada from over 290 suppliers, ranging from major producers to small independent companies. Pursuant to ancillary agreements entered into as part of the Chevron Combination, Dynegy has the obligation to purchase and the right to market substantially all of the natural gas produced or controlled by Chevron in the United States (except Alaska). The Chevron relationship provides the Company with a significant, stable supply of natural gas which, when combined with gas supplies available from its network of other supply sources, allows it to effectively manage gas supplies and reduces the risk of short-term supply shortages during periods of peak demand. TRANSPORTATION. The Company arranges for transportation of the natural gas it markets from the supplier receipt point to the delivery point requested by the purchaser. The Company generally retains title to the natural gas from the receipt point to the delivery point and obtains transportation on unaffiliated pipelines. The Company believes that its understanding of the United States' pipeline network, along with the scale and geographic reach of its gas marketing efforts, are important to the Company's success as a gas marketer. The Company uses a variety of transportation arrangements to move its customers' volumes, including short-term and long-term firm and interruptible agreements with pipelines and brokered firm contracts with its customers. NATURAL GAS SALES. The Company sells natural gas under sales agreements that have varying terms and conditions intended to match seasonal and other changes in demand. The Company's wholesale customer base consists primarily of gas and electric utilities and industrial and commercial end-users and marketers of natural gas. In 1999, sales were made to approximately 820 customers located throughout the contiguous United States and parts of Canada. For the year ended December 31, 1999, the Company's North American operations sold an aggregate average of 8.8 Bcf per day of natural gas. NATURAL GAS STORAGE. Natural gas storage capacity plays an important role in the Company's ability to act as a full-service natural gas marketer by allowing it to manage relatively constant gas supply volumes with uneven demand levels. Through the use of its storage capabilities, the Company offers peak delivery services to satisfy winter heating and summer electric-generating demands. Storage inventories also provide performance security or "backup" service to the Company's customers. The Company at various times leases short-term and long-term firm and interruptible storage. 7 10 UNITED KINGDOM. The Company maintains an independent energy marketing business through a wholly owned subsidiary in the United Kingdom. Additionally, Dynegy owns a twenty-five percent participating preferred stock interest in Accord Energy Limited ("Accord"), a U.K.-based energy marketing company. During 1999, the Company's U.K. subsidiary purchased product from 45 suppliers and marketed sales to 46 customers. For the year ended December 31, 1999, the Company's U.K.-based operations sold an aggregate average of 1.1 Bcf per day of natural gas. Additionally, in 1999, the U.K. energy trading operation began financial trading in the United Kingdom and the Norway Power Pool ("Nord Pool") electricity markets. ENERGY CONVERGENCE SEGMENT - POWER Dynegy markets electricity and power products and services through indirect wholly-owned subsidiaries, providing a 24-hour-a-day resource for the sale and purchase of power through access to wholesale markets throughout North America. The Company helps generation customers manage and optimize their fuel supplies, optimize generation assets and capacity utilization and maximize energy conversion and tolling opportunities. In addition, the Company provides market aggregation and sales assistance and risk-management services and strategies. The Company will at times contract for transmission capacity over regulated transmission lines in order to facilitate regional movements of power. In 1999, Dynegy made sales to approximately 200 customers and sold 67 million-megawatt hours of electricity. Following the close of the Illinova acquisition, Dynegy had interests in power projects in operation, under construction, in late stage development or pending acquisition having combined gross capacity of 12,227 megawatts of electricity. The Illinova acquisition added 4,989 megawatts of capacity to Dynegy's portfolio; however, Dynegy was required by the federal Public Utility Regulatory Policies Act of 1978 ("PURPA") to divest or restructure its interests in certain qualified facilities, as a condition precedent to closing the Illinova acquisition. Such interests were divested on February 1, 2000, resulting in the loss of 709 gross megawatts of capacity. Approximately 64 percent of owned capacity is gas-fired and a majority of the gas-fired capacity is held through interests owned in joint ventures or other similar financial structures. In addition to ownership and operation of generating capacity, the Company may, at times, provide services to the ventures in which it owns an interest in the areas of project development, engineering, environmental affairs, operating and maintenance services, business management and fuel supply services. Such management services include: o Engineering oversight of all conceptual planning, feasibility studies, environmental studies and plant, engineering and construction design; o Specialized and comprehensive operating, maintenance, testing and start-up services; o Power and fuel management involving purchases and sales for and from the projects; o Contract negotiation; o Development and maintenance of business plans and forecasts; o Development and implementation of profit improvement opportunities; o Monitoring regulatory, legislative, and environmental affairs; and o Providing various accounting and financial services. MIDSTREAM SEGMENT - NATURAL GAS GATHERING AND PROCESSING The natural gas processing industry is a major segment of the oil and gas industry, providing the necessary service of refining raw natural gas into marketable pipeline quality natural gas and natural gas liquids. The Company owns interests in 38 gas processing plants, including 24 plants that it operates, as well as associated and stand-alone natural gas gathering pipeline systems. These assets are primarily located in the key producing areas of New Mexico, Texas, Louisiana, Arkansas, Oklahoma, Kansas and Alberta, Canada. During 1999, the Company processed an average of 2.9 Bcf per day of natural gas and produced an average of 123 thousand barrels per day of natural gas liquids. As part of the Chevron Combination's ancillary agreements, Dynegy acquired the right to process substantially all of Chevron's processable natural gas in those geographic areas where it is economically feasible for Dynegy to provide such service. Through two transactions, one in December 1999 and one in January 2000, the company agreed to sell its Mid-Continent natural gas processing and gathering facilities. These facilities were non-strategic, were under-performing in comparison to other assets in its portfolio and exposed Dynegy to commodity price risk that was difficult to mitigate on a consistent basis. The December sale has closed and the January sale is 8 11 set to close in March 2000. During 1999, these combined assets processed an average of 362 Bcf per day of natural gas and produced an average of 30 thousand barrels per day of natural gas liquids. As part of the December 1999 sale, Dynegy executed a purchase and sale contract to acquire substantially all of the natural gas liquids processed by certain of these natural gas processing plants for a period of three years. The aggregate sales proceeds from these sales approximated $422 million and the Company recognized no material gain or loss on either transaction. MIDSTREAM SEGMENT - FRACTIONATION Natural gas liquids removed from the natural gas stream at gas processing plants are generally in the form of a commingled stream of liquid hydrocarbons (raw product). The commingled natural gas liquids are separated at fractionation facilities into the component products of ethane, propane, normal butane, isobutane and natural gasoline. The Company has ownership interests in three fractionation facilities; two in Mont Belvieu, Texas and one in Lake Charles, Louisiana. During 1999, these facilities fractionated an average of 327 thousand gross barrels per day. MIDSTREAM SEGMENT - NGL MARKETING In North America, the Company markets its own NGL production and also purchases NGLs from third parties for resale. Dynegy also markets and trades LPGs throughout the world through use of chartered large-hull ships. Product marketed and traded by this business is acquired from producing areas in the North Sea, West Africa, Algeria and the Arabian Gulf as well as from the U.S. Gulf Coast region. During 1999, the Company sold approximately 537 thousand barrels per day of natural gas liquids to over 820 customers from these operations. MIDSTREAM SEGMENT - TRANSPORTATION OPERATIONS The Company's transportation assets are inter-connected with the nation's gas liquids and natural gas pipeline systems. Through this network of pipeline connections, terminals, rail cars, trucks, barges and storage facilities, the Company moves natural gas liquids from producing regions in the Gulf Coast, West and Midwest to most major domestic and international markets. The Company operates large-scale marine terminals in Texas, Florida and Louisiana, which offer importers a variety of methods for transporting products to the marketplace. In addition, Dynegy has access to over 60 million barrels of underground liquids storage providing customers with the ability to store, trade, buy and sell specification products. Dynegy also leases large-hull ships capable of importing/exporting liquid petroleum gas to/from markets throughout the world. MIDSTREAM SEGMENT - CRUDE OIL MARKETING During 1999, Dynegy placed its domestic crude oil marketing operations for sale, as the business was not considered strategic or complementary to the organization's long-term strategy. Divestiture of these operations is expected to occur in the first quarter 2000. During 1999, the Company sold approximately 207 thousand barrels per day of crude oil to over 100 customers. The Company will continue crude oil marketing operations in Canada, through a wholly owned Canadian subsidiary. BUSINESS RISK MANAGEMENT ASSESSMENT Dynegy's operations and periodic returns are impacted by a myriad of factors, some of which may not be mitigated by risk management methods. These risks include, but are not limited to, commodity price, interest rate and foreign exchange rate fluctuations, weather patterns, counterparty risk, management estimations, strategic investment decisions, changes in competition, operational risks, environmental risks and changes in regulation. The Company is exposed to commodity price variability related to its natural gas, natural gas liquids, crude oil, electricity and coal businesses. In addition, fuel requirements at its power generation and gas processing facilities represent additional commodity price risks to the Company. In order to manage these commodity price risks, Dynegy routinely utilizes certain types of fixed-price forward purchase and sales contracts, futures and option contracts traded on the New York Mercantile Exchange and swaps and options traded in the over-the-counter financial markets to: o Manage and hedge its fixed-price purchase and sales commitments; o Provide fixed-price commitments as a service to its customers and suppliers; 9 12 o Reduce its exposure to the volatility of cash market prices; o Protect its investment in storage inventories; and o Hedge fuel requirements at its gas processing and power generation facilities. The Company may, at times, have a bias in the market, within established guidelines, resulting from the management of its portfolio. In addition, as a result of marketplace liquidity and other factors, the Company may, at times, be unable to fully hedge its portfolio for certain market risks. Dynegy monitors its exposure to fluctuations in interest rates and foreign currency exchange rates and may execute swaps, forward-exchange contracts or other financial instruments to hedge and manage these exposures. The Company employs the mark-to-market method of accounting for a portion of its operations, which accounts for all energy trading activities at fair value as of each balance sheet date and recognizes currently in its results of operations the net gains or losses resulting from the revaluation of these contracts. As a result, substantially all of the operations of the Company's world-wide gas marketing, power marketing, and crude marketing operations are accounted for under a mark-to-market accounting methodology. In certain of these markets, long-term contract commitments may extend beyond the period in which market quotations for such contracts are available. The lack of long-term pricing liquidity requires the use of mathematical models to value these commitments under the accounting method employed. These mathematical models utilize historical market data to forecast future elongated pricing curves, which are used to value the commitments that reside outside of the liquid market quotations. The application of forecasted pricing curves to contractual commitments may result in realized cash returns on these commitments that vary, either positively or negatively, from the results estimated through application of the mathematical model. Dynegy believes that its mathematical models utilize state-of-the-art technology, pertinent industry data and prudent discounting in order to forecast certain elongated pricing curves. Dynegy's commercial groups manage, on a portfolio basis, the resulting market risks inherent in commercial transactions, subject to parameters established by the Dynegy Board of Directors. Market risks are monitored by a risk control group that operates independently from the commercial units that create or actively manage these risk exposures to ensure compliance with Dynegy's risk management policies. Risk measurement is also practiced against the Dynegy portfolios with value at risk, stress testing and scenario analysis. In addition to risks associated with price or interest rate movements, credit risk is also inherent in the Company's operations. Credit risk relates to the risk of loss resulting from the nonperformance of contractual obligations by a counterparty. Dynegy maintains credit policies with regard to its counterparties, which management believes minimize its overall credit risk. Dynegy's stated business strategy is to expand ownership or control of merchant generation capacity in select markets across the country. Dynegy believes that merchant generation capacity, which is designed principally to supply power to markets during periods of peak demand, offers the greatest flexibility in executing its strategy of an integrated gas and power marketing and power generation business. This strategy heightens the risk for volatility in periodic returns by increasing the Company's exposure to variability in anticipated demand resulting from: o changing weather patterns, o unexpected delays in industry-wide construction of new capacity, o unforeseen supply constraints or bottlenecks resulting from transmission failures or other factors, o unforeseen new technologies, and o other similar factors. Further, as Dynegy moves forward with the execution of its strategic plan to own or control 70,000 megawatts of capacity within five years, risk of earnings volatility increases through exposure to unanticipated variability in generation capacity dependability factors. As a result of supply contracts routine in the industry, Dynegy's exposure relating to performance by these generating assets resides not only with owned and controlled assets, but also with third-party operated facilities. The volatility of earnings, whether it be favorable or unfavorable, will likely be most profound during periods of peak demand when, and if, regional industry-wide generation capacity fails or is curtailed. The increasing importance of and dependency upon physical generation of electricity as a percentage of Dynegy's overall portfolio and strategy may substantially alter Dynegy's earnings risk profile over time. Finally, the addition of these generation assets to Dynegy's portfolio may increase enterprise exposure to environmental and regulatory laws and regulations. These exposures could result in increased expenditures for capital 10 13 improvements to meet certain statutory requirements and could result in expenditures for remediation of unanticipated environmental contamination. The potential redirection of capital to these types of expenditures could reduce the level of available discretionary capital currently expected to be used in executing Dynegy's strategic plan in future periods. Many of these risks are outside the control of Dynegy and may not be fully mitigated through application of risk management methods and/or state-of-the-art, first quartile power generation operating methods. COMPETITION All phases of the businesses in which Dynegy is engaged are highly competitive. In connection with both domestic and foreign operations, the Company encounters strong competition from companies of all sizes, having varying levels of financial and personnel resources. Dynegy competes in its energy marketing and trading businesses with international, national and regional full service energy providers, merchants, producers and pipelines for sales based on its ability to aggregate competitively priced supplies from a variety of sources and locations and to utilize efficient transportation. With respect to its marketing and trading operations, Dynegy believes that: o E-Commerce will fast become the primary business enabler resulting in a shift in how the industry conducts its business; o Customers will increasingly scrutinize the financial condition of their suppliers to assure that contract obligations will be met; o Suppliers and transporters will demand more stringent credit terms to secure performance; o The increased role of full service energy providers may add to the financial cost of doing business; o Increasing availability of pricing information to participants in the industry will continue to exert downward pressure on per-unit profit margins in the industry; o Suppliers will have to be multi-fuel marketers; and o Large competitors having significant liquidity and other resources will compete with Dynegy for similar business. As a result, Dynegy believes its financial condition and its access to capital markets will play an increasing role in distinguishing the Company from many of its competitors. Further, Dynegy believes that technological advances in executing transactions will differentiate the competition in the near term. Operationally, Dynegy believes its ability to remain a low-cost merchant and to effectively combine value-added services, competitively priced supplies and price risk management services will determine the level of success in its marketing and trading operations. The demand for power may be met by generation capacity based on several competing technologies, such as gas-fired or coal-fired cogeneration and power generating facilities fueled by alternative energy sources including hydro power, synthetic fuels, solar, wind, wood, geothermal, waste heat, solid waste and nuclear sources. The Company's power generation business competes with other non-utility generators, regulated utilities, unregulated subsidiaries of regulated utilities and other energy service companies in the development and operation of energy-producing projects. The trend towards deregulation in the U.S. electric power industry has resulted in a highly competitive market for acquisition or development of domestic power generating facilities. As the nation's regulated utilities seek non-regulated investments and states move toward retail electric competition, these trends can be expected to continue for the foreseeable future. The Company's natural gas liquids and crude oil marketing businesses face significant competition from a variety of competitors including major integrated oil companies, major pipeline companies and their marketing affiliates and national and local gas gatherers, processors, brokers, marketers and distributors of varying sizes and experience. The principal areas of competition include obtaining gas supplies for gathering and processing operations, obtaining supplies of raw product for fractionation, the marketing of natural gas liquids, crude oil, residue gas, condensate and sulfur, and the transportation of natural gas, natural gas liquids and crude oil. Competition typically arises as a result of the location and operating efficiency of facilities, the reliability of services and price and delivery capabilities. The trend towards industry consolidation in the North American upstream liquids businesses has resulted in a highly competitive market for acquisition and development of such facilities. Dynegy's leadership position in this industry provides unique opportunities to extract value from its investments. The Company believes it has the infrastructure, long-term marketing abilities, financial resources and management experience to enable it to effectively compete. 11 14 REGULATION GENERAL. The Company is subject to the laws, rules and regulations of the jurisdictions and countries in which it conducts its operations. The regulatory burden on the energy industry increases its cost of doing business and, consequently, affects its profitability. Inasmuch as these rules and regulations are frequently amended or reinterpreted, the Company is unable to predict the future cost or impact of complying with such regulations. These rules and regulations affect the industry as a whole; therefore, the Company does not believe that it is affected in a significantly different manner from its competitors. NATURAL GAS REGULATION. The transportation and sale for resale of natural gas is subject to regulation by the Federal Energy Regulatory Commission ("FERC") under the Natural Gas Act of 1938, as amended ("NGA") and, to a lesser extent, the Natural Gas Policy Act of 1978, as amended ("NGPA"). Interstate transportation and storage services by natural gas companies, including interstate pipeline companies, and the rates charged for such services, are regulated by the FERC. Certain of the Company's pipeline activities and facilities are involved in interstate transportation of natural gas, crude oil and natural gas liquids, and are subject to these or other federal regulations. NATURAL GAS MARKETING. Commencing in 1985, the FERC promulgated a series of orders and regulations adopting changes that significantly altered the business of transporting and marketing natural gas by fostering competition. The thrust of these regulations was to induce interstate pipeline companies to provide nondiscriminatory transportation services to producers, distributors and other shippers. The effect of the foregoing regulations has been the creation of an open access market for natural gas purchases and sales and the creation of a business environment which has fostered the evolution of various unregulated, privately negotiated natural gas sales, purchase and transportation arrangements. Regulations in Canada have resulted in a similar business environment in that country. The sale for resale of natural gas in North America has substantially completed its evolution to an unregulated, open access market. The Company does not believe that any further regulatory matters will have a material adverse effect on the Company's operations or competitiveness. In the first quarter 2000, the FERC issued Order No. 637 which changed the character of interstate transportation services. Interstate pipelines will begin implementation of the new regulations in May 2000. The Company does not believe that the terms of the FERC Order will adversely effect its operations. In Canada, certain federal and provincial regulatory authorities require parties to hold export or removal permits for transactions pursuant to which natural gas is to be exported from the jurisdiction in which it is produced. These requirements apply whether the gas is removed from one province to another or from a province to the United States. The Company's indirectly wholly-owned Canadian subsidiary, Dynegy Canada Inc., holds permits from the National Energy Board, the Alberta Energy and Utilities Board ("AEUB") and the British Columbia Ministry of Employment and Investment, Oil and Gas Section for such purposes. In addition, Dynegy Canada Inc. holds export permits from the National Energy Board similar to the foregoing for butane, propane and crude oil. In the United Kingdom, regulation of the natural gas business is subject to regulation by the Office of Gas Supply. GAS PROCESSING. The primary function of Dynegy's gas processing plants is the extraction of natural gas liquids and the conditioning of natural gas for marketing, and not natural gas transportation. The FERC has traditionally maintained that a processing plant is not a facility for transportation or sale for resale of natural gas in interstate commerce and therefore is not subject to jurisdiction under the NGA. Even though the FERC has made no specific declaration as to the jurisdictional status of the Company's gas processing operations or facilities, Dynegy believes its gas processing plants are primarily involved in removing natural gas liquids and therefore exempt from FERC jurisdiction. Nonetheless, certain facilities downstream of processing plants are being considered for use in transporting gas between pipelines, which may invoke FERC's jurisdiction. Such jurisdiction should apply to the downstream facility as a pipeline, however, and not to the plants themselves. In Alberta Canada, the AEUB governs the permitting, emissions and operations of gas gathering and processing facilities. These facilities require a permit from the AEUB to process or transport a specified volume of gas and a demonstration at the time of application that the impact on the environment will be minimal. Dynegy Canada Inc. holds all necessary permits required in order to own and operate its processing and gathering facilities. 12 15 Notwithstanding the jurisdiction of the AEUB, the rates, terms and conditions of service of such facilities are generally the result of privately negotiated arrangements. GATHERING. The NGA exempts gas-gathering facilities from the jurisdiction of the FERC. Interstate transmission facilities, on the other hand, remain subject to FERC jurisdiction. The FERC has historically distinguished between these two types of facilities on a fact-specific basis. Dynegy believes its gathering facilities and operations meet the current tests used by the FERC to determine a nonjurisdictional gathering facility status. Some of the recent cases applying these tests in a manner favorable to the determination of Dynegy's nonjurisdictional status are still subject to rehearing and appeal. In addition, the FERC's articulation and application of the tests used to distinguish between jurisdictional pipelines and nonjurisdictional gathering facilities have varied over time. While the Company believes current definitions create nonjurisdictional status for Dynegy's gathering facilities, no assurance can be given that such facilities will remain classified as gas gathering facilities and the possibility exists that the rates, terms, and conditions of the services rendered by those facilities, and the construction and operation of the facilities will be subject to regulation by the FERC or by the various states in the absence of FERC regulation. OTHER REGULATORY ISSUES. The Company's gas purchases and sales are generally not regulated by the FERC or other regulatory authorities; however, as a gas merchant, the Company depends on the gas transportation and storage services offered by various pipeline companies to enable the sale and delivery of its gas supplies. Additionally, certain other pipeline activities and facilities of the Company are involved in interstate and intrastate transportation and storage services and are subject to various federal and state regulations which generally regulate rates, terms and conditions of service. ELECTRICITY MARKETING REGULATION. The Federal Power Act ("FPA") and rules promulgated by the FERC regulate the transmission of electric power in interstate commerce and sales for resale of that power. As a result, portions of these operations are under the jurisdiction of the FPA and FERC. In April 1996, the FERC adopted rules ("Order 888") to expand transmission service and access and provide alternative methods of pricing for transmission services. Order 888 is intended to open the FERC-jurisdictional interstate transmission grid in the continental United States to all qualified persons that seek transmission services to wheel wholesale power. Utilities are required to provide transmission customers non-discriminatory open access to their transmission grids with rates, terms, and conditions comparable to that which the utility imposes on itself. Order 888 was upheld by the FERC in March 1997 and is subject to appeal. Second generation implementation issues arising out of Order 888 abound. These include issues relating to power pool structures and transmission pricing. These too will likely find their way to the courts, and their outcome cannot be predicted. In December, 1999, FERC issued Order 2000 addressing some of the significant regional transmission issues. Transmission owning utilities are required to file plans by October, 2000, to detail their participation in an organization that will control the transmission facilities within a region. Illinois Power will be required to make such a filing. The electric marketing transactions of Dynegy may also be impacted by the functioning of these new regional transmission organizations. The Order allows significant flexibility in the structure of these new organizations and thus their impact on Dynegy's power marketing business and Illinois Power's transmission operations cannot be predicted. POWER GENERATION REGULATION. Historically in the United States, regulated and government-owned utilities have been the only significant producers of electric power for sale to third parties. Pursuant to the enactment of PURPA, companies other than utilities were encouraged to enter the electric power business by reducing regulatory constraints. In addition, PURPA and its implementing regulations created unique opportunities for the development of cogeneration facilities by requiring utilities to purchase electric power generated in cogeneration plants meeting certain requirements (referred to as "Qualifying Facilities"). As a result of PURPA, a significant market for electric power produced by independent power producers developed in the United States. The exemptions from extensive federal and state regulation afforded by PURPA to Qualifying Facilities are important to Dynegy and its competitors. To meet the utility ownership limitation imposed on Qualifying Facilities by FERC rules, Dynegy sold all or part of its interest in a number of Qualifying Facilities prior to the Illinova acquisition. The remaining cogeneration projects that Dynegy currently owns meet the requirements under PURPA to be Qualifying Facilities and are maintained on that basis. In 1992, Congress enacted the Energy Policy Act of 1992 ("Energy Act"), which amended the FPA and the Public Utility Holding Company Act of 1935 ("PUHCA") to create new exemptions from PUHCA for independent power producers selling electric energy at wholesale, to increase electricity transmission access for independent power producers and to reduce the burdens of complying with PUHCA's restrictions on corporate structures for owning or 13 16 operating generating or transmission facilities in the United States or abroad. The Energy Act has enhanced the development of independent power projects and has further accelerated the changes in the electric utility industry that were initiated by PURPA. Changes in PURPA, PUHCA and other related federal statutes may occur in the next several years. The nature and impact of such changes on the Company's projects, operations and contracts is unknown at this time. Dynegy actively monitors these developments to determine such impacts as well as to evaluate new business opportunities created by restructuring of the electric power industry. Depending on the outcome of these legislative matters, changes in legislation could have an adverse effect on current contract terms. The enactment in 1978 of PURPA and the adoption of regulations thereunder by the FERC and individual states provide incentives for the development of small power production facilities and cogeneration facilities meeting certain criteria. In order to be a Qualifying Facility, a cogeneration facility must (i) produce not only electricity but also a certain quantity of thermal energy (such as steam) which is used for a qualified purpose other than power generation, (ii) meet certain energy operating and efficiency standards when oil or natural gas is used as a fuel source and (iii) not be controlled or more than 50 percent owned by an electric utility or electric utility holding company, or any combination thereof. PURPA provides two primary benefits to Qualifying Facilities owned and operated by non-utility generators. First, Qualifying Facilities under PURPA are exempt from certain provisions of PUHCA, the FPA and, except under certain limited circumstances, state laws respecting rate and financial regulation. Second, PURPA requires that electric utilities purchase electricity generated by Qualifying Facilities at a price equal to the purchasing utility's full "avoided cost" and that the utility sell back-up power to the Qualifying Facility on a non-discriminatory basis. The FERC regulations also permit Qualifying Facilities and utilities to negotiate agreements for utility purchases of power at rates other than the purchasing utility's avoided cost. If Congress amends PURPA, the statutory requirement that an electric utility purchase electricity from a Qualifying Facility at full avoided costs could be eliminated. Although current legislative proposals specify the honoring of existing contracts, repeal of the statutory purchase requirements of PURPA going forward could increase pressure to renegotiate existing contracts. Any changes that result in lower contract prices could have an adverse effect on the Company's operations and financial position. The Congress passed the Energy Act to promote further competition in the development of new wholesale power generation sources. Through amendments to PUHCA, the Energy Act encourages the development of independent power projects that are certified by the FERC as exempt wholesale generators ("EWGs"). The owners or operators of qualifying EWGs are exempt from the provisions of PUHCA, but not from the FPA. The Energy Act also provides the FERC with extensive new authority to order electric utilities to provide other electric utilities, Qualifying Facilities and independent power projects with access to their transmission systems. However, the Energy Act does preclude the FERC from ordering transmission services to retail customers and prohibits "sham" wholesale energy transactions which appear to provide wholesale service, but actually are providing service to retail customers. The FPA grants the FERC exclusive ratemaking jurisdiction over wholesale sales of electricity in interstate commerce. The FPA provides the FERC with ongoing as well as initial jurisdiction, enabling the FERC to revoke or modify previously approved rates. Such rates may be based on a cost-of-service approach or on rates that are determined through competitive bidding or negotiation on a market basis. Although Qualifying Facilities under PURPA are exempt from ratemaking and certain other provisions of the FPA, independent power projects (including EWGs) and certain power marketing activities are subject to the FPA and to the FERC's ratemaking jurisdiction. Utilities are not obligated to purchase power from projects subject to regulation by the FERC under the FPA because they do not meet the requirements of PURPA. However, because such projects would not be bound by PURPA's thermal energy use requirement, they may have greater latitude in site selection and facility size. All of the projects currently owned or operated by Dynegy as Qualifying Facilities under PURPA are exempt from the FPA. Dynegy's EWGs, El Segundo, Long Beach, Cabrillo I, Cabrillo II, Rocky Road, Commonwealth Atlantic and Hartwell, are subject to the FPA and the jurisdiction of the FERC. With approval from FERC, such entities, with certain exceptions, are exempted from being required to sell at cost-based rates and can make all sales at market-based rates set through negotiations. Independent power projects in which the Company has an interest and that are not Qualifying Facilities have been granted market based rate authority and comply with the FPA requirements governing approval of wholesale rates and subsequent transfers of ownership interests in such projects. Development of projects in international markets typically creates exposure and obligations to the national, provincial and local laws of each host country, worldwide environmental standards and requirements imposed by multi-lateral lending institutions. The principal regulatory consideration for international projects is PUHCA, since it is broadly applicable to the ownership and operation of power facilities (including generation and transmission facilities) both inside and outside of the United States (international projects that sell power outside the United States are not 14 17 subject to the FPA). For international projects, the principal basis for exemption from PUHCA is by obtaining EWG status from the FERC. EWG status is very beneficial for international projects because EWGs are generally allowed to make retail sales in international markets. Another way to obtain an exemption from PUHCA for foreign ownership and operation activities is by filing a foreign utility company determination ("FUCO") with the Securities and Exchange Commission. However, FUCO filings are less frequently used, because unlike EWGs, no formal regulatory order is issued confirming the status of a FUCO. The development of international power generation and transmission projects also may entail other multi-national regulatory considerations arising under United States law, including export/import controls, trade laws and other similar legislation. Dynegy attempts to identify and manage those issues early in the development process to ensure compliance with such laws and regulations. STATE REGULATORY REFORMS. Legislation currently under review in various states affecting gas and power marketing and power generation businesses is most likely to impact Dynegy in the near term. Other state regulatory reforms impacting the Company's processing and gathering operations and other businesses are also proceeding. While the ultimate impact of such legislation on the Company's businesses cannot be predicted with certainty, the Company does not believe that the outcome of these matters will have a material adverse effect on the Company's operations or competitiveness. ILLINOIS POWER COMPANY. As stated previously herein, Dynegy acquired an electric and natural gas utility engaged in the transmission, distribution and sale of electricity and natural gas. The acquisition of this business increases the Company's exposure to regulation at both the federal and state levels as the Company manages the operations of Illinois Power in concert with the rulings and regulations handed down by FERC and the Illinois Commerce Commission, respectively. Management is confident that it has the resources in place to effectively manage the anticipated issues imposed by this regulation. SHAREHOLDER AGREEMENT Pursuant to the Illinova acquisition, Chevron entered into a shareholder agreement with Dynegy, Illinova Holding and Dynegy Holding governing certain aspects of the relationship of Chevron and Dynegy both before and after the merger. The shareholder agreement addressed numerous issues, the more significant of which are discussed below. The shareholder agreement required Chevron to file with the SEC an application seeking an exemption or exclusion from the registration requirements under PUHCA that would otherwise apply to Chevron by virtue of its ownership interest in Dynegy. Chevron filed a good faith application with the SEC seeking exemption from the registration requirements under PUHCA prior to closing of the merger. The application is pending at the SEC and the SEC may take action on this application at any time as there is no time limit imposed on the SEC to complete its review of such application. If, upon review, the SEC chooses to deny or conditionally grant the application, Dynegy is obligated to take all necessary actions to ensure that Chevron qualifies for an exemption under PUHCA. These actions may include a divestiture of Dynegy's Transmission and Distribution segment assets. The shareholder agreement contains rights relating to and limitations on acquisitions of common stock by Chevron. Chevron is entitled to preemptive rights to acquire shares of common stock in proportion to its existing ownership of Dynegy stock, whenever Dynegy issues shares of stock or securities convertible into stock. In addition, Chevron may freely acquire up to 40 percent of the outstanding voting securities of Dynegy. However, should any acquisition by Chevron require Chevron to register under PUHCA, Dynegy has no obligation to take any action to avoid that registration. If Dynegy subsequently redeems or repurchases any shares, Chevron is not required to reduce its ownership interest, even if Chevron's resulting ownership interest is in excess of 40%. Any shares of Class A common stock acquired by Chevron will automatically convert into Class B common stock. If Chevron acquires more than 40 percent of Dynegy's voting securities, it must make an offer to acquire all of the outstanding stock of Dynegy. For the first year after the merger closes, Chevron may not make any such offer (or a related acquisition) unless a third person seeks to acquire a 15% voting interest in Dynegy. Thereafter, Chevron may make such an offer at any time. Any offer by Chevron for all of the outstanding stock is subject to an auction process. The shareholder agreement contains detailed provisions governing the auction but, in general, Chevron at its election may either (1) participate in the auction without any special priority or other rights vis-a-vis other bidders, or (2) not participate in the auction and instead have the right to purchase all of the outstanding stock of Dynegy at 105% of the bid selected by Dynegy's board of directors. If Chevron agrees to purchase Dynegy at 105% of the selected bid, the purchase agreement will contain customary termination provisions including a 5% 15 18 termination fee. If Chevron is not the successful bidder under either process, it is obligated to vote in favor of the bid or tender its Dynegy shares, as the case may be. However, if Chevron is the successful bidder, and Dynegy subsequently terminates the agreement (and pays Chevron the 5 percent termination fee), Chevron is free to tender for any and all stock of Dynegy and to pursue any rights and remedies available to it. In this instance, Chevron would not be required to support any alternative transaction which Dynegy might then wish to pursue. Except in conjunction with a permitted offer, Chevron may not become a participant in the solicitation of proxies concerning any acquisition of voting securities of Dynegy. The shareholder agreement generally prohibits Chevron from selling or transferring any shares of Class B common stock for a period of one year following the closing of the merger. Exceptions to this rule allow Chevron to transfer these shares to an affiliate of Chevron and does not restrict disposition or transfer of shares as required by any governmental regulatory authority. After the one year restriction, Chevron may sell or transfer shares of Class B common stock in the following transactions: o in a widely-dispersed public offering; or o a sale to an unaffiliated third party, provided that Dynegy is given the opportunity to purchase, or to find a different buyer to purchase, the shares proposed to be sold by Chevron. Upon the sale or transfer to any person other than an affiliate of Chevron, the shares of Class B common stock are automatically converted into shares of Class A common stock. The shareholder agreement provides that Dynegy may require Chevron and its affiliates to sell all of the shares of Class B common stock under certain circumstances. These rights are triggered if Chevron or its Board designees block - which they are entitled to do under Dynegy's Bylaws - any of the following transactions two times in any 24 month period or three times over any period of time: o the issuance of new shares of stock where the aggregate consideration to be received exceeds the greater of $1 billion or one-quarter of Dynegy's total market capitalization; o any merger, consolidation, joint venture, liquidation, dissolution, bankruptcy, acquisition of stock or assets, or issuance of common or preferred stock, any of which would result in payment or receipt of consideration having a fair market value exceeding the greater of $1 billion or one-quarter of Dynegy's total market capitalization; or o any other transaction or series of related transactions having a fair market value exceeding the greater of $1 billion or one-quarter of Dynegy's total market capitalization. However, upon occurrence of one of these triggering events and in lieu of selling Class B common stock, Chevron may elect to retain the shares of Class B common stock but forfeit its right and the right of its board designees to block the transaction listed above. A block consists of a vote against a proposed transaction by either (a) all of Chevron's representatives on the board of directors present at the meeting where the vote is taken (if the transaction would otherwise be approved by the board of directors) or (b) any of the Class B common stock held by Chevron and its affiliates if the transaction otherwise would be approved by at least two-thirds of all other shares entitled to vote on the transaction, excluding shares held by management, directors or subsidiaries of Dynegy. The shareholder agreement also prohibits Dynegy from taking the following actions: o issuing any shares of Class B common stock to any person other than Chevron and its affiliates; o amending any provisions in the articles of incorporation or bylaws which, in each case, contain or implement the special rights of holders of Class B common stock, without the consent of the holders of the shares to Class B common stock or the three directors elected by such holders; o adopting a shareholder rights plan, "poison pill" or similar device that prevents Chevron from exercising its rights to acquire shares of common stock or from disposing of its shares when required by Dynegy; and o acquiring, owning or operating a nuclear power facility, other than being a passive investor in a publicly-traded company that owns a nuclear facility. The provisions of the shareholder agreement terminate as follows: o The limitations on acquisitions and transfers by Chevron, the buyout rights, the restrictions on certain actions of Dynegy and Chevron's preemptive rights all terminate on the date Chevron and its affiliates cease to own 16 19 shares representing at least 15 percent of the outstanding voting power of Dynegy. At such time all of the shares of Class B common stock held by Chevron would convert to shares of Class A common stock; and o The remaining provisions (primarily relating to PUHCA) terminate on the date Chevron and its affiliates cease to own shares representing at least 10 percent of the outstanding voting power of Dynegy. ENVIRONMENTAL AND OTHER MATTERS Dynegy's operations are subject to extensive federal, state and local statutes, rules and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Development of projects in international markets creates exposure and obligations to the national, provincial and local laws of each host country, including environmental standards and requirements imposed by these governments. Compliance with these statutes, rules and regulations requires capital and operating expenditures including those related to monitoring, pollution control equipment, emission fees and permitting at various operating facilities and remediation obligations. Failure to comply with these statutes, rules and regulations may result in the assessment of civil and even criminal penalties. The Company's environmental expenditures have not been prohibitive in the past, but are anticipated to increase in the future with the trend toward stricter standards, greater regulation, more extensive permitting requirements and an increase in the number and types of assets operated by the Company subject to environmental regulation. No assurance can be given that future compliance with these environmental statutes, rules and regulations will not have a material adverse effect on the Company's operations or its financial condition. The vast majority of federal environmental remediation provisions are contained in the Superfund laws - the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and the Superfund Amendments and Reauthorization Act ("SARA") and in the corrective action provisions of the Federal Resource Conservation and Recovery Act ("RCRA"). Typically, the U.S. Environmental Protection Agency ("EPA") acts pursuant to Superfund legislation to remediate facilities that are abandoned or inactive or whose owners are insolvent; however, the legislation may be applied to sites still in operation. Superfund law imposes liability, regardless of fault or the legality of the original conduct, on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the current or previous owner and operator of a facility and companies that disposed, or arranged for the disposal, of the hazardous substance found at a facility. CERCLA also authorizes the EPA and, in certain instances, private parties to take actions in response to threats to public health or the environment and to seek recovery for the costs of cleaning up the hazardous substances that have been released and for damages to natural resources from such responsible party. Further, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. RCRA provisions apply to facilities that have been used to manage or are currently managing hazardous waste and which are either still in operation or have recently been closed. As amended, RCRA requires facilities to remedy any releases of hazardous wastes or hazardous waste constituents at waste treatment, storage or disposal facilities. The addition of fossil fuel-fired electric generation to Dynegy's portfolio, acquired in the Illinova acquisition, increases Dynegy's exposure to environmental regulation, as well as anticipated increased expenditures for remediation requirements and capital costs associated with Clean Air Act requirements and other federal and state legislation. Management is confident that it has the resources in place to effectively manage the anticipated issues imposed by this heightened regulation and the financial liquidity to address anticipated expenditures associated with adherence to such regulation. In connection with discrete asset acquisitions and sales, Dynegy may obtain or be required to provide indemnification against certain environmental liabilities. These indemnities are typically limited in scope and time period. To minimize its exposure for such liabilities, environmental audits of the assets Dynegy wishes to acquire are made, either by Dynegy personnel, outside environmental consultants, or a combination of the two. The Company has not heretofore incurred any material environmental liabilities arising from its acquisition or divestiture activities. The incurrence of a material environmental liability, and/or the failure of an indemnitor to meet its indemnification obligations with respect thereto, could have a material adverse effect on Dynegy's operations and financial condition. Subject to resolution of the complaints filed by the U.S. Environmental Protection Agency ("EPA") and the Department of Justice ("DOJ") against Illinois Power Company, management believes that it is in substantial compliance with, and is expected to continue to comply in all material respects with, applicable environmental 17 20 statutes, regulations, orders and rules. Further, to the best of management's knowledge, other than the previously referenced complaints, there are no existing, pending or threatened actions, suits, investigations, inquiries, proceedings or clean-up obligations by any governmental authority or third party relating to any violations of any environmental laws with respect to the Company's assets or pertaining to any indemnification obligations with respect to properties previously owned or operated by the Company, which would have a material adverse effect on the Company's operations and financial condition. Dynegy's aggregate expenditures for compliance with laws and regulations related to the discharge of materials into the environment or otherwise related to the protection of the environment approximated $4 million in 1999. Total environmental expenditures for both capital and operating maintenance and administrative costs are not estimated to approximate $75 million in 2000, inclusive of the assets purchased in the Illinova acquisition. In addition to environmental regulatory issues, the design, construction, operation and maintenance of the Company's pipeline facilities are subject to the safety regulations established by the Secretary of the Department of Transportation pursuant to the Natural Gas Pipeline Safety Act ("NGPSA"), or by state regulations meeting the requirements of the NGPSA, or to similar statutes, rules and regulations in Canada. The Company believes it is currently in substantial compliance, and expects to continue to comply in all material respects, with these rules and regulations. The Company's operations are subject to the requirements of the Federal Occupational Safety and Health Act ("OSHA") and other comparable federal, state and provincial statutes. The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of SARA and similar state statutes require that information be organized and maintained about hazardous materials used or produced in its operations. Certain of this information must be provided to employees, state and local government authorities and citizens. The Company believes it is currently in substantial compliance, and expects to continue to comply in all material respects, with these rules and regulations. OPERATIONAL RISKS AND INSURANCE Dynegy is subject to all risks inherent in the various businesses in which it operates. These risks include, but are not limited to, explosions, fires and product spillage, which could result in damage to or destruction of operating assets and other property, or could result in personal injury, loss of life or pollution of the environment, as well as curtailment or suspension of operations at the affected facility. Dynegy maintains general public liability, property and business interruption insurance in amounts that it considers to be adequate for such risks. Such insurance is subject to deductibles that the Company considers reasonable and not excessive. The occurrence of a significant event not fully insured or indemnified against, and/or the failure of a party to meet its indemnification obligations, could materially and adversely affect Dynegy's operations and financial condition. Moreover, no assurance can be given that Dynegy will be able to maintain insurance in the future at rates it considers reasonable. The Company has designated two of its subsidiaries to assist in the management of certain liabilities principally relating to environmental, litigation and credit reserves. Together with the involvement of third parties whose primary consideration will be based on the realization of savings by the Company, the subsidiaries will attempt to find new ways to handle these costs in a more efficient manner. EMPLOYEES At December 31, 1999, the Company employed approximately 1,319 employees at its administrative offices and approximately 1,144 employees at its operating facilities. Approximately 108 employees at Company-operated facilities are subject to collective bargaining agreements with one of the following unions: the Oil, Chemical and Atomic Workers International Union, the Metal Trades Council or the Communications, Energy and Paperworkers Union. Management considers relations with both union and non-union employees to be satisfactory. ITEM 1a. EXECUTIVE OFFICERS Set forth below are the names and positions of the current executive officers of the Company, together with their ages, position(s) and years of service with the Company. 18 21
SERVED WITH THE NAME AGE * POSITION(S) COMPANY SINCE C. L. Watson 50 Chairman of the Board, Chief Executive Officer, 1985 and a Director of the Company Stephen W. Bergstrom 42 President and Chief Operating Officer of 1986 Dynegy Inc., and a Director of the Company John U. Clarke 47 Executive Vice President, Chief Financial Officer 1997 Kenneth E. Randolph 43 Senior Vice President, General Counsel and 1984 Secretary of the Company
* As of April 1, 2000 The executive officers named above will serve in such capacities until the next annual meeting of the Company's Board of Directors, or until their respective successors have been duly elected and have been qualified, or until their earlier death, resignation, disqualification or removal from office. C. L. Watson is the Chairman and Chief Executive Officer of Dynegy Inc. He joined the company as President in 1985 and became Chairman and Chief Executive Officer of NGC in 1989. Prior to his employment with Clearinghouse, he served as Director of Gas Sales for the Western United States for Conoco Inc. Mr. Watson serves on the board of directors of Baker Hughes Incorporated. Stephen W. Bergstrom, President and Chief Operating of Dynegy Inc. is responsible for the day-to-day development and execution of Dynegy's strategy across its operating business units. He is also a member of Dynegy's board of directors. Mr. Bergstrom was formerly President and Chief Operating Officer of Dynegy Marketing and Trade and Senior Vice President of Dynegy Inc., with responsibility for natural gas and power marketing, supply and generation functions. After joining Clearinghouse in 1986 as Vice President of Gas Supply, Mr. Bergstrom was promoted to Senior Vice President of Gas Marketing and Supply in 1987. In 1990, he was named Executive Vice President of Clearinghouse. Prior to joining the Company, Mr. Bergstrom was Vice President of Gas Supply for Enron Gas Marketing. Mr. Bergstrom began his professional career with Transco Energy Company of Houston. John U. Clarke, Executive Vice President, Chief Financial Officer, joined the Company in April 1997 and serves as the Company's principal financial officer. Mr. Clarke is also an Advisory Director of the Company. Prior to joining Dynegy, Mr. Clarke was a managing director and co-head of a specialty energy practice group with Simmons & Company International, an investment-banking firm for approximately one year. He previously had served as President of Concept Capital Group, Inc., a financial advisory firm formed by Mr. Clarke in May, 1995. Mr. Clarke was Executive Vice President and Chief Financial and Administrative Officer with Cabot Oil & Gas Corporation from August 1993 to February 1995, and worked for Transco Energy Company, from April 1981 to May 1993, last serving as Senior Vice President and Chief Financial Officer. Mr. Clarke began his career with Tenneco Inc. in January 1978. He is a director of Natco Group, Inc. Kenneth E. Randolph serves as Senior Vice President, General Counsel and Secretary of the Company. He has served in this capacity for Dynegy (or its predecessor, Clearinghouse) since July 1987. In addition, he served as a member of the Clearinghouse Management Committee from May 1989 through February 1994 and managed Clearinghouse's marketing operations in the Western and Northwestern United States from July 1984 through July 1987. Prior to his employment with the Company, Mr. Randolph was associated with the Washington, D.C. office of Akin, Gump, Strauss, Hauer & Feld, L.L.P. 19 22 ITEM 2. PROPERTIES Current year operational activity conducted in these areas is discussed under "Item 1. BUSINESS - General." Following is a description of such properties owned by the Company at December 31, 1999. POWER GENERATION FACILITIES Dynegy has interests in twenty-eight power projects in operation, under construction, in late stage development or pending acquisition. The majority of these projects are cogeneration facilities operated by Dynegy. The portfolio also includes one heat recovery plant. A cogeneration plant utilizes power production technology that results in the sequential generation of two or more useful forms of energy (e.g., electricity and steam) from a single fuel source (e.g., natural gas). The Company's generation assets include projects that are Qualifying Facilities or EWGs (including "Merchant Plants"). A Qualifying Facility is operated under laws outlined in PURPA, by the FERC and by certain state legislatures, as previously discussed herein, and typically sells the power it generates to a single power purchaser. A Merchant Plant operates independently from designated power purchasers and as a result will generate and sell power to the market when market economics dictate that electricity prices exceed the cost of production. Merchant Plants provide flexibility to the Company in executing its Energy Convergence strategy. The combined gross capacity of facilities in operation is approximately 5,687 megawatts of electricity and over 3.6 million pounds per hour of steam. The following table provides pertinent information concerning power projects owned by the Company:
================================================================================================================================= SUMMARY OF DYNEGY'S POWER GENERATION FACILITIES ================================================================================================================================= POWER GENERATION PERCENT GROSS PRIMARY PROJECT OWNED CAPACITY LOCATION FUEL PRIMARY POWER PURCHASER ---------------- ----------- -------- --------------- ---------- --------------------------------- (MW) OPERATING CoGen Power (3) 50 5 Port Arthur, TX Waste heat Great Lakes Carbon Corporation CoGen Lyondell (3) Lessee (50%) 610 Channelview, TX Gas-fired Lyondell Chemical Company Oyster Creek 50 424 Freeport, TX Gas-fired The Dow Chemical Company Corona (1) 40 47 Corona, CA Gas-fired SOCAL Edison Company Kern Front(1) 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company High Sierra(1) 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company Double "C" (1) 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company San Joaquin (1) 100 48 Stockton, CA Gas-fired Pacific Gas & Electric Company Chalk Cliff(1) 100 46 Kern County, CA Gas fired Pacific Gas & Electric Company Badger Creek(1) 50 46 Kern County, CA Gas-fired Pacific Gas & Electric Company McKittrick(1) (2) 100 46 McKittrick, CA Gas-fired Pacific Gas & Electric Company Live Oak(1) (2) 50 46 Kern County, CA Gas-fired Pacific Gas & Electric Company Crockett (1) 8 240 Crockett, CA Gas-fired Pacific Gas & Electric Company Bear Mountain(1) 100 46 Bakersfield, CA Gas-fired Pacific Gas & Electric Company El Segundo 50 1,020 El Segundo, CA Gas-fired Merchant Facility Long Beach 50 560 Long Beach, CA Gas-fired Merchant Facility Black Mountain 50 85 Las Vegas, NV Gas-fired Nevada Power Company Commonwealth Atlantic 50 340 Chesapeake, VI Gas-fired Virginia Electric & Power Company Hartwell Energy 50 300 Hart County, GA Gas-fired Ogelthorpe Power Corporation Michigan Power 50 123 Ludington, MI Gas-fired Consumers Energy Company Cabrillo I - Encina 50 1,008 Carlsbad, CA Gas-fired Merchant Facility Cabrillo II - California CT 50 253 San Diego County, CA Gas-fired Merchant Facility Rocky Road 50 250 East Dundee, IL Gas-fired Merchant Facility ----- TOTAL 5,687 =================================================================================================================================
20 23
================================================================================================================================= DEVELOPMENT PROJECTS Rockingham 100 800 Rockingham County, NC Gas-fired Duke Energy (3 years) Calcasieu 100 155 Lake Charles, LA Gas-fired Merchant Facility Heard County 100 500 Heard County, GA Gas-fired Merchant Facility Palmetto Power 100 500 Osceola County, FL Gas-fired Merchant Facility Bluegrass 100 500 Louisville, KY Gas-fired Merchant Facility Rocky Road Expansion 50 100 East Dundee, IL Gas-fired Merchant Facility CoGen Lyondell Expansion 50 155 Channelview, TX. Gas-fired Merchant Facility ------ Total 2,710 ------ TOTAL CAPACITY 8,397 =================================================================================================================================
(1) Interest in Qualifying Facility sold February 1, 2000 pursuant to PURPA requirements. (2) Dynegy's ownership increased to 100 percent in McKittrick effective October 1, 1999 and in Live Oak effective January 1, 2000. (3) In December 1999, Dynegy's ownership/lessee interest decreased from 100 percent. GATHERING SYSTEMS AND PROCESSING FACILITIES Dynegy's natural gas processing services are provided at two types of gas processing plants, referred to as field and straddle plants. Field plants aggregate volumes from multiple producing wells into quantities that can be economically processed to extract natural gas liquids and to remove water vapor, solids and other contaminants. Straddle plants are situated on mainline natural gas pipelines and allow operators to extract natural gas liquids from a natural gas stream when the market value of natural gas liquids separated from the natural gas stream is higher than the market value of the same unprocessed natural gas. The following table provides certain information, including operational data for the year ended December 31, 1999, concerning the gas processing plants and gathering systems in which Dynegy owns an interest.
=============================================================================================================================== SUMMARY OF DYNEGY'S GAS PROCESSING FACILITIES =============================================================================================================================== LOCATION TOTAL PLANT ---------------------------- ---------------------------- PRACTICAL 1999 INLET NGL GAS PROCESSING FACILITIES % OWNED COUNTY/PARISH STATE CAPACITY (2) THROUGHPUT PRODUCTION --------------------------------------- --------- ------------------ --------- -------------- ------------- ---------------- (MMcf/d) (1) (Bpd) (1) OPERATED FIELD PLANTS - Chico Complex (3) 100.00 Wise TX 100 77.8 11,520.8 Fashing 58.24 Atascosa TX 38 14.7 298.5 Gladys 100.00 Alberta Can. 15 4.3 37.0 Mazeppa 100.00 Alberta Can. 80 38.5 518.0 Sand Hills Complex (3) 100.00 Crane TX 200 147.0 14,588.9 Sherman (3) 100.00 Grayson TX 33 19.1 835.8 Sligo 100.00 Bossier LA 40 31.3 599.6 West Seminole (3) 40.14 Gaines TX 5 4.0 399.6 Versado Gas Processors Joint 63.00 Various TX / NM --- 147.6 18,456.7 Venture (7) OPERATED STRADDLE PLANTS - Barracuda 100.00 Cameron LA 190 187.6 5,278.5 Lowry (3) 100.00 Cameron LA 265 233.9 6,555.4 Stingray 100.00 Cameron LA 300 266.6 3,488.7 VESCO 23.00 Plaquemines LA 299 223.8 5,767.0 Yscloskey (5)(8) 27.71 St. Bernard LA 473 251.2 7,751.6 NON-OPERATED FIELD PLANTS - Diamond M (3) 7.66 Scurry TX --- 0.7 53.3 Indian Basin (3) 16.35 Eddy NM 30 21.6 1,659.8 Snyder (3) (6) 3.25 Scurry TX 2 1.8 109.2 Waskom 33.33 Gregg TX 50 37.6 1,555.6 NON-OPERATED STRADDLE PLANTS - Bluewater (8) 15.20 Acadia LA 122 27.6 424.9 Calumet (5) (8) 32.60 St. Mary's LA 300 256.2 5,676.4 Iowa 9.92 Jefferson LA 50 359.9 931.0 Davis Patterson (8) 17.20 St. Mary's LA 3 5.8 199.5 Sea Robin (8) 0.80 Vermillion LA 187 5.2 205.2 Terrebone (8) 7.40 Terrebone LA 10 30.1 1,190.4 Toca (8) 13.80 St. Bernard LA 93 110.6 4,658.3 ===============================================================================================================================
21 24
=============================================================================================================================== FIRST QUARTER 2000 DISPOSITIONS: OPERATED FIELD PLANTS - Binger (3) (9) 100.00 Caddo OK 10 7.3 795.3 Canadian Complex (3) (9) 100.00 Hemphill TX 25 20.5 1,947.1 Leedey (3) (9) 100.00 Roger Mills OK 50 26.8 2,495.5 Lefors Complex (3) (9) 100.00 Wheeler TX 13 10.0 2,786.0 Moores Orchard (3) (10) 100.00 Fort Bend TX 7 3.1 44.5 Niject (9) 00.16 Caddo OK 3 0.0 1.0 Ringwood (3) (9) 100.00 Major OK 75 18.5 1,666.5 Rodman (3) (9) 100.00 Garfield OK 65 55.5 4,999.4 OPERATED STRADDLE PLANTS - Cheney (9) 100.00 Kingman KS 85 59.7 3,369.8 NON-OPERATED FIELD PLANTS - Spivey (4) (5) (9) 5.16 Harper KS 3 10.1 35.5 Dover Hennessey (3) (9) 18.29 Kingfisher OK 14 4.9 516.0 Maysville (3) (9) 44.00 Garvin OK 59 35.6 4,916.1 ===============================================================================================================================
(1) Capacity, throughput and gross production are net to the Company's ownership interest. (2) Capacity data is at practical recovery rates, net to Dynegy's interest. (3) Dynegy owns the indicated percentage of an associated gas gathering system. (4) Dynegy owns 2.48 percent of the associated gas gathering system. (5) Dynegy ownership is adjustable and subject to periodic (usually annual) redetermination. (6) Dynegy owns the indicated percentage of the Snyder gas gathering system and 3.98 percent of the Diamond M gas gathering system that also supplies the Snyder plant. (7) Versado Gas Processors includes the Saunders, Monument and the Eunice Complex facilities. Ownership in the Saunders, Monument and Eunice facilities changed from 100 percent to 63 percent during 1998 as a result of formation of a joint venture with Texaco. Statistical information includes the aggregate inlet gas throughput and NGL production volumes accruing to Dynegy's interest during the year. (8) Dynegy ownership change attributable to a swap with Texaco reducing our interest in Sea Robin in exchange for an increased interest in this facility. (9) A definitive purchase and sale agreement was signed on January 28, 2000 for the sale of this plant. Sale expected to be completed by March 2000. (10) This plant was sold in January 2000. FRACTIONATION FACILITIES The following table provides certain information concerning stand alone fractionation facilities in which Dynegy owns an interest.
========================================================================================================================== SUMMARY OF DYNEGY'S FRACTIONATION FACILITIES (1) ========================================================================================================================== PERCENT 1999 FRACTIONATION FACILITIES OWNED GROSS CAPACITY (2) NET CAPACITY (2) INLET THROUGHPUT - ------------------------------------------------- ---------- -------------------- ------------------- -------------------- (MBbls/d) (MBbls/d) (MBbls/d) Lake Charles, La. (3) 100.00 55 55 38 Cedar Bayou Fractionators (Mont Belvieu, Tx.) 88.00 205 180 178 Gulf Coast Fractionators (Mont Belvieu, Tx.) 38.75 110 42 111 ==========================================================================================================================
(1) Table does not include fractionation operations at VESCO or at other gas processing facilities. (2) Gross capacity data is at practical recovery rates and net capacity is at practical rates multiplied by Dynegy's interest. (3) The Lake Charles, La. Fractionator extracts ethane and propane only. 22 25 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 ===========================================================================================================================
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 1999 THROUGHPUT (1) STATES DESCRIPTION - ---------------------------------------- --------- --------------------- --------------- ------------------------------- Crude Oil Pipeline System 100.00 28.0 TX/OK Crude oil pipelines Kansas Gas Supply (2) 100.00 54.2 KS/OK Intrastate natural gas pipeline Dynegy NGL Pipeline 100.00 26.0 TX/LA Interstate liquids pipeline Pelican Pipeline 100.00 29.0 LA Gas gathering pipeline Vermillion Pipeline 100.00 8.1 Gulf of Mexico Gas gathering pipeline Western Gas Gathering (2) 100.00 2.6 KS Gas gathering pipeline Pawnee Rock (2) 100.00 10.6 KS Gas gathering pipeline Seahawk 100.00 26.4 LA Intrastate natural gas pipeline Dynegy Midstream Pipeline, Inc. (2) 100.00 44.4 OK Interstate natural gas pipeline Dynegy Intrastate Gas Supply (2) 100.00 4.9 TX Intrastate natural gas pipeline Lake Boudreaux 100.00 0.8 LA Gas gathering pipeline Grand Lake Liquids System 100.00 2.5 LA Intrastate liquids pipeline Gregg Lake 36.00 19.7 Alberta, Can. Gas gathering pipeline ==================================================================================================================================
1. 1999 throughput is based on thousands of barrels per day for the liquids and crude lines and million cubic feet per day for the gas gathering and transportation lines. 2. A definitive purchase and sale agreement was signed on January 28, 2000 for the sale of this asset. Sale expected to be completed by March 2000. 23 26 OTHER PROPERTY INFORMATION Dynegy owns a 39 percent interest in a partnership that owns and operates the West Texas LPG Pipeline, an interstate LPG pipeline. The interest was acquired in the Chevron Combination. In 1996, the Company and Chevron formed Venice Gas Processing Company, a Texas limited partnership ("Venice"). Venice was formed for the purpose of owning and operating the Venice Complex, located in Plaquemines Parish, Louisiana. The complex includes 271 miles of pipeline that extends into the Gulf of Mexico having capacity of 810 MMcf/d, a lean oil gas processing plant, a 35,000 barrel per day fractionator, a 299 MMcf/d cryogenic gas processing unit, 12 million barrels of NGL storage capacity, a marine terminal and acreage. In 1997, Venice reorganized as a limited liability company changing its name to VESCO. In September 1997, the VESCO members agreed to expand ownership in VESCO to include an affiliate of Shell Midstream Enterprises, a subsidiary of Shell Oil Company ("Shell"), effective September 1, 1997, in exchange for Shell's commitment of certain offshore reserves to VESCO. In 1998, ownership in the LLC was again expanded to include Koch, in exchange for their contribution of the cryogenic processing unit. At December 31, 1999, Dynegy's interest in VESCO approximated 23 percent. Dynegy operates the facility and has commercial responsibility for product distribution and sales. TITLE TO PROPERTIES The Company believes it has satisfactory title to its properties in accordance with standards generally accepted in the energy industry, subject to such exceptions which, in the opinion of the Company, would not have a material adverse effect on the use or value of said properties. The operating agreements for certain of the Company's natural gas processing plants and fractionation facilities grant a preferential purchase right to the plant owners in the event that any owner desires to sell its interest. Such agreements may also require the consent of a certain percentage of owners before rights under such agreements can be transferred. The Company is subject, as a plant owner under such agreements, to all such restrictions on transfer of its interest. In a few instances, the Company has granted rights of first refusal with respect to any future sale of certain assets. Certain of the Company's power generation assets are subject to rights of first refusal or consent requirements with the Company's partners or power purchasers which restrict the transfer of interests in the facilities. Substantially all of Dynegy's gathering and transmission lines are constructed on rights-of-way granted by the apparent record owners of such property. In some instances, land over which rights-of-way have been obtained may be subject to prior liens that have not been subordinated to the right-of-way grants. Permits have been obtained from public authorities to cross over or under, or to lay facilities in or along, water courses, county roads, municipal streets and state highways, and in some instances, such permits are revocable at the election of the grantor. Permits have also been obtained from railroad companies to cross over or under lands or rights-of-way, many of which are also revocable at the grantor's election. Some such permits require annual or other periodic payments. In a few minor cases, property was purchased in fee. INDUSTRY SEGMENTS Segment financial information is included in Note 15 of Dynegy's consolidated financial statements contained elsewhere herein. ITEM 3. LEGAL PROCEEDINGS Through its acquisition of Destec Energy Inc., Dynegy became a party to certain litigation with Pacific Gas and Electric Company ("PG&E") and with the Southern California Gas Company ("SOCAL"). These cases represent pre-acquisition contingencies acquired by the Company and settlement thereof did not have a material adverse effect on the Company's results of operations or financial position. The following describes resolution of these two cases. In April 1997, PG&E had filed a lawsuit in the Superior Court of the State of California, City and County of San Francisco, against Destec Energy, Inc., Destec Holdings, Inc. and Destec Operating Company (wholly-owned subsidiaries of the Company now known respectively as Dynegy Power Corp., Dynegy Power Holdings, 24 27 Inc. and Dynegy Operating Company) as well as against San Joaquin CoGen Limited ("San Joaquin") and its general partners (collectively the "Dynegy Defendants"). In the lawsuit, PG&E asserted claims and alleged unspecified damages for fraud, negligent misrepresentation, unfair business practices, breach of contract and breach of the implied covenant of good faith and fair dealing. Subsequent to the acquisition of Destec Energy Inc. by Dynegy, Dynegy and PG&E engaged in settlement discussions, which resulted in the execution of a Termination and Settlement Agreement between PG&E and the Dynegy Defendants on March 9, 1999 (the "PG&E Settlement Agreement"). The PG&E Settlement Agreement provided for, upon the receipt of CPUC approval, a dismissal with prejudice of PG&E's claims against the Dynegy Defendants, a release by PG&E of all claims relative to FERC matters and a termination of the San Joaquin power purchase agreement as of December 31, 1999, whereupon the San Joaquin facility would continue to operate as a merchant plant. Upon termination of the power purchase agreement, Dynegy would repay project debt of approximately $26 million. By Order dated October 7, 1999, the CPUC approved the PG&E Settlement Agreement. The CPUC approval became final on November 8, 1999. Pursuant to its lawsuit against Dynegy, PG&E had named Libbey-Owens-Ford ("LOF"), San Joaquin's steam host, as an additional defendant in the action in October 1997. It is alleged that San Joaquin was liable to PG&E under the Gas Transportation Agreement or Power Purchase Agreement due to LOF's failure to use sufficient quantities of steam as required to retain its status as a qualifying facility under federal standards. The Dynegy Defendants will seek to recover from LOF losses resulting from the settlement with PG&E. In March 1995, SOCAL had filed a lawsuit in the Superior Court of the State of California for the County of Los Angeles, against Destec Energy, Inc., Destec Holdings and Destec Gas Services, Inc. (now known respectively as Dynegy Power Corp., Dynegy Holdings, Inc. and Dynegy Gas Services, Inc.), wholly-owned direct and indirect subsidiaries of the Company (collectively, the "Defendants"), as well as against Chalk Cliff Limited and McKittrick Limited (collectively, the "Partnerships"). All general partners of the Partnerships were also named defendants. The lawsuit alleged breach of contract against the Partnerships and their respective general partners, and interference and conspiracy to interfere with contracts against the Defendants. The breach of contract claims arose out of the "transport-or-pay" provisions of the gas transportation service agreements between the Partnerships and SOCAL. SOCAL sought damages from the Partnerships for past damages and anticipatory breach damages in an amount equal to approximately $31 million. Subsequent to the acquisition of Destec Energy Inc. by Dynegy, Dynegy and SOCAL engaged in settlement discussions, which resulted in the execution of a Settlement Agreement between SOCAL and all defendants in the pending litigation on August 25, 1999, (the "SOCAL Settlement Agreement"). The SOCAL Settlement Agreement was approved by the CPUC and is final. The Settlement Agreement provided for the dismissal of the pending litigation, the termination of underlying gas transmission service contracts, and Dynegy's payment of settlement consideration approximating $31 million. The pending appeals were dismissed and the litigation and the associated foreclosure proceedings have therefore come to an end. On August 3, 1998, Modesto Irrigation District ("MID") filed a lawsuit against PG&E and Destec in federal court for the Northern District of California, San Francisco division. The lawsuit alleges violation of federal and state antitrust laws and breach of contract against Destec. The allegations are related to a power sale and purchase arrangement in the city of Pittsburg, CA. MID seeks actual damages from PG&E and Destec in amounts not less than $25 million. MID also seeks a trebling of any portion of damages related to its antitrust claims. By order dated February 2, 1999, the federal District Court dismissed MID's state and federal antitrust claims against PG&E and Destec; however, the Court granted MID leave of thirty days to amend its complaint to state an antitrust cause of action. On March 3, 1999, MID filed an amended complaint recasting its federal and state antitrust claims against PG&E and Destec and restating its breach of contract claim against Destec. PG&E and Destec have filed motions to dismiss MID's revised federal and state antitrust claims. The hearing on the motions to dismiss was held in July 1999. On August 20, 1999, the District Court again dismissed MID's antitrust claims against PG&E and Destec, this time without leave to amend the complaint. As a result of the dismissal of the antitrust claims, the District Court also dismissed the pendant state law claims. MID has appealed the District Court's dismissal of its suit to the Ninth Circuit Court of Appeal. Following dismissal of its federal court suit, MID filed suit in California state court asserting its breach of contract claims against Destec and its tortious interference with contract claims against PG&E. Motions to dismiss MID's state court claims are pending and scheduled for hearing during the first quarter 2000. Dynegy believes the allegations made by MID are meritless and will continue to vigorously defend MID's claims. In the opinion of management, the amount of ultimate liability with respect to these actions will not have a material adverse effect on the financial position or results of operations of the Company. On July 30, 1999, The Dow Chemical Company ("Dow") filed a lawsuit in the United States District Court for the District of Delaware against Dynegy Power Corporation ("DPC"), a wholly-owned subsidiary of the Company. Dow sought contribution from DPC in connection with claims against Dow asserted by The AES 25 28 Corporation ("AES") in a lawsuit filed on November 30, 1998 in the United States District Court for the Southern District of Texas. AES asserts various federal and Texas securities laws claims, and Texas claims for fraud and civil conspiracy, arising out of AES' September 1997 purchase of stock of Destec Engineering, a subsidiary of DPC (at that time Destec Power Corp). Specifically, AES alleges that Destec Power made certain misrepresentations about the expected profits that Destec Engineering would earn in connection with the construction of the Elsta power plant in The Netherlands, and the anticipated completion date of the Elsta plant. AES alleges that Dow is liable because it "controlled" or had the power to control the management of Destec Power. AES's original complaint did not assert any claims against Destec Power or any other Dynegy entity. Dow is vigorously defending against AES' claims. In response to a motion to transfer filed by Dow, the United States District Court for the Southern District of Texas transferred the suit to the United States District Court for Delaware. Following transfer of the litigation, AES added DPC as a defendant, asserting claims similar to the claims asserted against Dow. Dow subsequently dismissed the suit against DPC without prejudice. AES and DPC have reached a settlement of AES's claims against DPC. The settlement is currently before the District Court for approval. If approved by the District Court, the settlement will result in the dismissal of AES's suit against DPC with prejudice. In the opinion of management, the ultimate resolution of this lawsuit will not have a material adverse effect on the Company's financial position or results of operations. COMPLAINT AGAINST ILLINOIS POWER COMPANY. On November 3, 1999, the U.S. Environmental Protection Agency ("EPA") issued a Notice of Violation ("NOV") against Illinois Power Company ("Illinois Power") and, with the Department of Justice ("DOJ"), filed a Complaint against Illinois Power in the U.S. District Court for the Southern District of Illinois, No. 99C833. Similar notices and lawsuits have been filed against a number of other utilities. Both the NOV and Complaint allege violations of the Clean Air Act and regulations thereunder. More specifically, both allege, based on the same events, that certain equipment repairs, replacements and maintenance activities at Illinois Power's three Baldwin Station generating units constituted "major modifications" under either or both the Prevention of Significant Deterioration and the New Source Performance Standards regulations. When non-exempt "major modifications" occur, the Clean Air Act and related regulations generally require that generating facilities meet more stringent emissions standards. The DOJ amended its complaint to assert the claims found in the NOV. Illinois Power is filing responsive pleadings in the first quarter 2000. The regulations under the Clean Air Act provide certain exemptions to the definition of "major modifications," particularly an exemption for routine repair, replacement or maintenance. The Company has analyzed each of the activities covered by the EPA's allegations and believes each activity represents prudent practice regularly performed throughout the utility industry as necessary to maintain the operational efficiency and safety of equipment. As such, the Company believes that each of these activities is covered by the exemption for routine repair, replacement and maintenance and that the EPA is changing, or attempting to change through enforcement actions, the intent and meaning of its regulations. The Company also believes that, even if some of the activities in question were found not to qualify for the routine exemption, there were no increases either in annual emissions or in the maximum hourly emissions achievable at any of the units caused by any of the activities. The regulations provide an exemption for increased hours of operation or production rate and for increases in emissions resulting from demand growth. Although none of Illinois Power's other facilities are covered in the Complaint and NOV, the EPA has officially requested information concerning activities at Illinois Power's Vermilion, Wood River and Hennepin Plants. It is possible that the EPA will eventually commence enforcement actions against those plants as well. The EPA has the authority to seek penalties for the alleged violations in question at the rate of up to $27,500 per day for each violation. The EPA also will be seeking installation of "best available control technology" ("BACT") (or equivalent) at the Baldwin Station and possibly at the other three plants as well. The Company believes that the EPA's and DOJ's claims are without merit, and that the ultimate resolution of this lawsuit will not have a material adverse effect on the Company's financial position or results of operations. The Company assumed liability for various claims and litigation in connection with the Illinova acquisition, Chevron Combination, the Trident Combination, the Destec acquisition and in connection with the acquisition of certain gas processing and gathering facilities from Mesa Operating Limited Partnership. The Company believes, based on its review of these matters and consultation with outside legal counsel, that the ultimate resolution of such items will not have a material adverse effect on the Company's financial position or results of 26 29 operations. Further, the Company is subject to various legal proceedings and claims, which arise in the normal course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not have a material adverse effect on the financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A special meeting (the "Special Meeting") of the stockholders of Dynegy was held on October 11, 1999. The purpose of the Special Meeting was to consider and vote upon (i) the Agreement and Plan of Merger, dated as of June 14, 1999 (the "Merger Agreement"), by and among Illinova Corporation, Energy Convergence Holding Company, Energy Convergence Acquisition Corporation, Dynegy Acquisition Corporation and Dynegy Inc. and (ii) approve the adoption of the Dynegy Inc. 2000 Long Term Incentive Plan (the "Long Term Incentive Plan"). The following votes were cast with respect to the approval and adoption of the Merger Agreement and the Long Term Incentive Plan, respectively:
LONG TERM INCENTIVE MERGER AGREEMENT PLAN For: 144,443,075 133,007,249 Against/Withheld 141,719 11,520,574 Abstentions: 4,033 31,504 Broker Non-Votes: --- ---
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Class A Common Stock, no par value ("Class A Common Stock") is listed and traded on the New York Stock Exchange under the ticker symbol "DYN". The number of stockholders of record of the Class A Common Stock as of February 28, 2000, was 35,713. The following table sets forth the high and low closing prices for transactions involving the Company's common stock for each calendar quarter (prior to consummation of the Illinova transaction), as reported on the New York Stock Exchange Composite Tape and related dividends paid per common share during such periods.
================================================================================================================== SUMMARY OF DYNEGY'S COMMON STOCK PRICE AND DIVIDEND PAYMENTS ================================================================================================================== HIGH LOW DIVIDEND ----------- ----------- ------------ 1999: Fourth Quarter $ 24.313 $ 20.375 $ 0.0125 Third Quarter 24.375 20.250 0.0125 Second Quarter 20.750 14.250 0.0125 First Quarter 15.000 10.250 0.0125 1998: Fourth Quarter $ 15.250 $ 10.250 $ 0.0125 Third Quarter 14.063 9.563 0.0125 Second Quarter 15.375 12.500 0.0125 First Quarter 17.250 14.625 0.0125 ==================================================================================================================
Prior to consummation of the Illinova acquisition, the holders of the common stock were entitled to receive dividends if, when and as declared by the Board of Directors of the Company out of funds legally available 27 30 therefor. Consistent with the Board of Directors' intent to establish a policy of declaring quarterly cash dividends, a cash dividend of $0.0125 per share was declared and paid in each quarter during 1999 and 1998. The holders of the Series A Preferred Stock were entitled to receive dividends or distributions equal per share in amount and kind to any dividend or distribution payable on shares of the Company's common stock, when and as the same are declared by the Company's Board of Directors. Accordingly, the Company also paid quarterly cash dividends on its Series A Preferred Stock of $0.0125 per share, or $0.05 per share on an annual basis. In 2000, Dynegy's Class A and Class B common stock will be entitled to a $0.60 per share dividend if, when and as declared by the Board of Directors of the Company out of funds legally available therefor. The Class B common stock has certain conversion features and maintains certain preemptive rights under the shareholder agreement. The holders of the Series A Convertible Preferred Stock are entitled to receive dividends or distributions totaling $3.00 per share annually if and when declared by the Board of Directors of the Company out of funds legally available therefor. Dividends on the preferred shares are cumulative from the date of issuance and are payable quarterly on the last day of March, June, September and December. The preferred stock carry certain priority, liquidation, redemption, conversion and voting rights not available to the common shareholders. 28 31 ITEM 6. SELECTED FINANCIAL DATA The selected financial information presented below was derived from, and is qualified by reference to, the Consolidated Financial Statements of the Company, including the Notes thereto, contained elsewhere herein. The selected financial information should be read in conjunction with the Consolidated Financial Statements and related Notes and Management's Discussion and Analysis of Financial Condition and Results of Operations.
================================================================================================================== DYNEGY'S SELECTED FINANCIAL DATA ================================================================================================================== YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------- ------------ ------------ ----------- ----------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA (1) : Revenues $ 15,429,976 $ 14,257,997 $ 13,378,380 $ 7,260,202 $ 3,665,946 Operating margin 543,875 428,687 385,294 369,500 194,660 General and administrative expenses 200,717 185,708 149,344 100,032 68,057 Depreciation and amortization expense 129,458 113,202 104,391 71,676 44,913 Asset impairment, abandonment Severance and other charges --- 9,644 275,000 --- --- Net income (loss) $ 151,849 $ 108,353 $ (102,485) $ 113,322 $ 92,705 Earnings (loss) per share (3) $ 0.91 $ 0.66 $ (0.68) $ 0.83 $ 0.82 Pro forma earnings per share (3) n/a n/a n/a n/a $ 0.40 Shares outstanding 166,975 164,605 167,009 136,099 113,176 Cash dividends per common share $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05 CASH FLOW DATA: Cash flows from operating activities $ 8,839 $ 250,780 $ 278,589 $ (30,954) $ 90,648 Cash flows from investment activities (318,664) (295,082) (510,735) (111,140) (310,623) Cash flows from financing activities 326,688 49,622 204,984 176,037 221,022 OTHER FINANCIAL DATA: EBITDA (4) $ 450,780 $ 363,517 $ 291,899 $ 289,023 $ 142,538 Dividends or distributions to partners, 8,115 7,988 7,925 6,740 9,253 net Capital expenditures, acquisitions And investments (5) 448,522 478,464 1,034,026 859,047 979,603 ==================================================================================================================
================================================================================================================== DECEMBER 31, ----------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------------- ------------ ------------ ----------- ----------- ($ IN THOUSANDS) BALANCE SHEET DATA (2) : Current assets $ 2,805,080 $ 2,117,241 $ 2,018,780 $ 1,936,721 $ 762,939 Current liabilities 2,538,523 2,026,323 1,753,094 1,548,987 705,674 Property and equipment, net 2,017,881 1,932,107 1,521,576 1,691,379 948,511 Total assets 6,525,171 5,264,237 4,516,903 4,186,810 1,875,252 Long-term debt 1,333,926 1,046,890 1,002,054 988,597 522,764 Total equity 1,309,482 1,128,063 1,019,125 1,116,733 552,380 ==================================================================================================================
(1) The Destec Acquisition was accounted for as an acquisition of a business in accordance with the purchase method of accounting and the results of operations attributed to the acquired business are included in the Company's financial statements and operating statistics effective July 1, 1997. The Chevron Combination was accounted for as an acquisition of assets under the purchase method of accounting and the results of operations attributed to the acquired assets are included in the Company's financial statements and operating statistics effective September 1, 1996. The Trident Combination was accounted for as an acquisition of a business in accordance with the purchase method of accounting and the results of operations attributed to the acquired business are included in the Company's financial statements and operating statistics effective March 1, 1995. (2) The Destec Acquisition and the Chevron and Trident Combinations were each accounted for under the purchase method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the effective dates of each transaction. The effective dates of the Destec Acquisition, Chevron Combination and Trident Combination were June 30, 1997, September 1, 1996 and March 1, 1995, respectively. (3) Earnings (loss) per share are computed in accordance with provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share", for each of the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. Pro forma earnings per share for the year ended December 31, 1995 is based on reported net income for the period adjusted for the incremental statutory federal and state income taxes that would have been provided had Clearinghouse been a taxpaying entity prior to the Trident Combination. The pro forma earnings per share 29 32 computation for the year ended December 31, 1995, eliminates the effect of a one-time $45.7 million income tax benefit associated with the Trident Combination. The weighted average shares outstanding for the year ended December 31, 1995, is based on the weighted average number of common shares outstanding plus the common stock equivalents that would arise from the exercise of outstanding options or warrants, when dilutive. (4) Earnings before interest, taxes, depreciation and amortization ("EBITDA") is presented as a measure of the Company's ability to service its debt and to make capital expenditures. It is not a measure of operating results and is not presented in the Consolidated Financial Statements. The 1997 amount includes the non-cash portion of items associated with the $275 million impairment and abandonment charge. (5) Includes all value assigned the assets acquired in various business and asset acquisitions. The 1997 amount is before reduction for value received upon sale of Destec's foreign and non-strategic assets of approximately $735 million. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL COMPANY PROFILE Dynegy Inc. ("Dynegy" or the "Company") is a leading provider of energy products and services in North America, the United Kingdom and in continental Europe. Products marketed by the Company's wholesale marketing operations include natural gas, electricity, coal, emissions, natural gas liquids, crude oil, liquid petroleum gas and related services. The Company's wholesale marketing operations are supported by ownership or control of an extensive asset base and transportation network that includes unregulated power generation, gas and liquids storage capacity, gas, power and liquids transportation capacity and gas gathering, processing and fractionation assets. Dynegy's asset base is further broadened by the acquisition of Illinova, providing significant fossil-fuel merchant generation capacity and a regional electric and natural gas utility engaged in the transmission, distribution and sale of electricity and natural gas. The critical mass achieved through the combination of a large scale energy marketing operation with strategically located assets which augment the marketing efforts affords the Company the ability to offer innovative, value-creating energy solutions to its customers. The Company is a holding company that conducts substantially all of its business through its subsidiaries. From inception of operations in 1984 until 1990, Clearinghouse limited its activities primarily to natural gas marketing. Starting in 1990, Clearinghouse began expanding its core business operations through acquisitions and strategic alliances resulting in the formation of a midstream energy asset business and establishing energy marketing operations in both Canada and the United Kingdom. The Company initiated electric power marketing operations in February 1994 in order to exploit opportunities created by the deregulation of the domestic electric power industry. Effective March 1, 1995, Clearinghouse and Holding merged and the combined entity was renamed NGC. On August 31, 1996, NGC completed a strategic combination with Chevron U.S.A. Inc. and certain Chevron affiliates whereby substantially all of Chevron's midstream assets merged with NGC. Effective July 1, 1997, NGC acquired Destec. During 1998, the Company changed its name to Dynegy Inc. in order to reflect its evolution from a natural gas marketing company to an energy services company capable of meeting the growing demands and diverse challenges of the dynamic energy market of the 21st Century. On June 14, 1999, Dynegy and Illinova announced the execution of definitive agreements for the merger of Illinova and Dynegy. The merger transaction was closed on February 1, 2000. BUSINESS SEGMENTS Dynegy's operations are reported herein in two segments: the Energy Convergence and Midstream segments. In 2000, the Company will add a third business segment consisting of regulated utility operations, operating under Illinois Power Company, acquired in the Illinova acquisition. This segment will be referred to as the Transmission and Distribution segment. The Energy Convergence segment is actively engaged in value creation through marketing and trading of natural gas, power, coal and emissions and the generation of electricity principally under the name Dynegy Marketing and Trade. The Midstream segment consists of the North American midstream liquids operations, the global liquefied petroleum gas transportation and the natural gas liquids marketing operations, located primarily in Houston and in London, and certain other businesses. The North American midstream liquids operations are actively engaged in the gathering and processing of natural gas and the transportation, fractionation and storage of NGLs. The Midstream segment operates principally under the name Dynegy Midstream Services. 30 33 ILLINOVA ACQUISITION Dynegy completed its acquisition of Illinova early in the first quarter 2000. Illinova was an energy services holding company maintaining four principal operating subsidiaries. These subsidiaries were: o Illinois Power Company, an electric and natural gas utility engaged in the transmission, distribution and sale of electricity and natural gas, serving approximately 650,000 customers over a 15,000 square-mile area of Illinois; o Illinova Power Marketing, Inc., a subsidiary engaged in the ownership and operation of unregulated fossil-fueled electric generation in Illinois; o Illinova Generating, Inc., a subsidiary that invests in, develops and operates independent power projects worldwide; and o Illinova Energy Partners, Inc., a subsidiary that markets energy and energy-related services in the United States and Canada. Illinois Power Company operations will continue as a regulated regional utility. The operations of Illinois Power Marketing, Inc. and Illinova Generating, Inc., respectively, are part of Dynegy's unregulated portfolio of merchant generation capacity and related operations within Dynegy Marketing and Trade, a division in the Energy Convergence segment. Illinova Energy Partners, Inc. is part of Dynegy Energy Services, another division within the Energy Convergence segment. The merger of Dynegy and Illinova involved the creation of a new holding company, now known as Dynegy Inc., and two separate but concurrent mergers. In one concurrent merger, a wholly-owned subsidiary of Dynegy Inc. merged with and into Illinova. In the other concurrent merger, a second wholly-owned subsidiary of Dynegy Inc. merged with and into old Dynegy. As a result of these two concurrent mergers, Illinova and old Dynegy continue to exist as wholly-owned subsidiaries of Dynegy Inc., and are referred to as Illinova Holding and Dynegy Holding, respectively. Dynegy accounted for the merger as a purchase of Illinova. This accounting treatment is based on various factors present in the merger, including the majority ownership (and voting control) of Dynegy's shareholders following the merger, the role of Dynegy's management following the merger (including the service of C.L. Watson as Chairman and Chief Executive Officer) and the influence of Chevron because of the size of its ownership interest and its rights under the shareholder agreement, articles of incorporation and bylaws. As a result, the consolidated financial statements of Dynegy after the merger will reflect the assets and liabilities of Dynegy at historical book values and the assets and liabilities of Illinova at fair values. In the combination, Dynegy shareholders, other than Chevron U.S.A. Inc. ("Chevron"), NOVA Gas Services (U.S.) Inc. ("NOVA") and BG Holdings, Inc., elected to exchange each Dynegy share for 0.69 of a share of Dynegy Class A common stock, based on a fixed exchange ratio, or elected to receive $16.50 per share in cash consideration, subject to proration. NOVA and BG Holdings, Inc. elected cash and thereby reduced their respective ownership in Dynegy as part of this combination. Therefore, instead of receiving Dynegy Class A common stock in exchange for their respective shares of Dynegy Holding common stock, NOVA and the parent of BG Holdings, Inc. each received a combination of cash, subject to proration, and shares of Dynegy Series A Convertible Preferred Stock. Chevron received shares of Dynegy Class B common stock in exchange for all of its shares of Dynegy Holding common stock and Series A Preferred Stock, respectively. Additionally, as part of the combination, Chevron purchased $200 million of additional Dynegy Class B common stock. Each share of Illinova common stock was converted into one share of Dynegy Class A common stock. Immediately after the combination, former Dynegy shareholders owned approximately 51 percent of the outstanding shares of Dynegy. Approximately 60 percent of the consideration received by existing Dynegy shareholders was in the form of Dynegy stock and 40 percent was cash. In aggregate, the cash portion of the consideration approximated $1.07 billion. Dynegy financed the cash component of the merger initially with borrowings under a debt facility and the issuance of $200 million of Class B common stock to Chevron. Dynegy anticipates repaying or refinancing a significant portion of the debt facility with proceeds from an offering of equity securities, additional public debt issuances, proceeds from asset sales and cash flow from operations. Dynegy believes the acquisition of Illinova provides significant financial, operational and corporate governance advantages that enhance its position as a leading provider of energy services and products. The combination will bring together a strong, innovative utility company owning strategically located generation assets 31 34 and operations, including electric transmission and retail distribution capabilities, with one of the leading North American energy marketers and independent power producers. These two companies have diverse but complementary operations, providing qualitative and quantitative expansion of Dynegy's electric generation capacity, while enhancing Dynegy's access to dependable cash flow and an improved platform for further expansion. It is expected that the combined company will be well positioned to be successful in the increasingly competitive energy marketplace. Dynegy expects the merger to enhance shareholder value more than either company could do on its own. Factors considered in evaluating the benefits of the merger included: o The merger is expected to be accretive to the earnings per share of the Dynegy shareholders; o The addition of Illinova's traditional utility business is expected to provide a stable base of cash flow from which the combined company will be able to leverage its business strategy; o The merger provides Dynegy with a larger platform in the electricity trading market from which it can expand its marketing operations. This larger platform is expected to provide the foundation for Dynegy's strategy to be at the forefront of the restructuring of the power industry and the convergence of the gas and electricity industries; o The merger adds an additional 4,989 gross megawatts of electricity generating capacity to Dynegy's post-merger capacity of 7,238 gross megawatts per year (both figures include current capacity as well as capacity under construction). This additional capacity is in the Midwestern United States and is expected to allow Dynegy to sell more electricity for its on account on better terms throughout the North American market; o The merger is expected to provide continuing shareholders, who desire to invest in a full-service provider of energy products and services, an investment vehicle having the flexibility and resources required to respond to the numerous opportunities in the energy industry; o The merger provides the liquidity needed to allow certain Dynegy shareholders to reduce the size of their investment in Dynegy; and o The merger improves public float thereby enhancing the Company's access to equity capital at attractive cost. ASSET DISPOSITIONS During the fourth quarter of 1999 and in early 2000, the Company disposed of certain assets and settled certain contractual arrangements realizing approximately $795 million in aggregate net proceeds. These transactions were entered into as a result of statutory requirements pursuant to the acquisition of Illinova, for the purpose of eliminating operating assets considered non-strategic or which were under-performing in comparison to other assets in the portfolio and in some cases to diversify direct ownership in certain generation assets while maintaining commercial control over such investments. The net proceeds received in these transactions are being used to retire merger-related debt or are being re-deployed into the Company's capital investment program. The financial impact of these transactions in the aggregate were not material to Dynegy's results of operations or financial position in 1999 and is not expected to be material to net income or financial position for the year ended December 31, 2000. Further, disposition of these assets is not expected to have a material adverse effect on Dynegy's prospective competitive position in the businesses in which it operates. The transactions entered into and the reasons for such are as follows: o Qualified Facilities - As a condition precedent to the Illinova acquisition, Dynegy sold its interests in eleven qualifying cogeneration facilities to a third party for approximately $256 million. The sale of these interests was dictated by PURPA requirements imposed as a result of Dynegy's acquisition of a regulated utility. o Mid-Continent Liquids Assets - Through two transactions, one in December 1999 and one in January 2000, the company agreed to sell its Mid-Continent natural gas processing and gathering facilities. The December sale has closed and the January sale is set to close in March 2000. These facilities were non-strategic, were under-performing in comparison to other assets in the portfolio and exposed Dynegy to commodity price risk that was difficult to mitigate on a consistent basis. As part of the December 1999 sale, Dynegy executed a purchase and sale contract to acquire substantially all of the natural gas liquids processed by certain of these natural gas 32 35 processing plants for a period of three years. The aggregate net proceeds from these sales will approximate $422 million and the Company recognized no material gain or loss on either transaction. o Gasification Operations - In two separate transactions, Dynegy settled a long-term sales contract and sold the underlying technology and assets associated with its coal gasification business in Indiana. Coal gasification technology was not strategic to Dynegy's long-term goals. Aggregate net proceeds from these transactions is proprietary information. o Reduced Interest in Rocky Road Power Generation Facility - Dynegy reduced its ownership interest in the Rocky Road power generation facility, located in Illinois, from 100 percent to 50 percent in December 1999 pursuant to its stated plan to diversify ownership in these types of assets in order to deploy as much capital as possible to this segment of our operations. Dynegy continues to operate and market the energy from this facility through agency relationships with the LLC. Aggregate net proceeds from this transaction is proprietary information. o Crude Business - Dynegy's domestic crude oil marketing operations are held for sale. Management expects to dispose of these assets during the first quarter 2000. The Company's Canadian crude oil marketing operations are unaffected by this proposed disposition. EXECUTION OF BUSINESS STRATEGY Dynegy successfully executed key operating and business strategies that management believes provide impetus for financial growth in 2000 and beyond. Key accomplishments during the period, which are more fully described elsewhere herein, included: o Completion of the acquisition of Illinova; o Expansion of ownership or control of power generating assets and infrastructure; o Expansion of operations in the United Kingdom and in Europe; o Continued concentration on maximizing unit margins through selective disposition of marginally profitable sales volumes; o Expansion of a retail energy marketing strategy combining existing alliances with businesses acquired in the Illinova acquisition; o First quartile operating performance in the Company's natural gas liquids businesses through formation of joint ventures, asset consolidations, discrete asset dispositions, revenue enhancements and strategic cost efficiency and reduction measures; o Continued emphasis on "just-in-time" controlled inventory management techniques and execution of risk management methods to reduce exposure to swings in liquids commodity prices; o Continued implementation of technology infrastructure improvements intended to provide the Company with state-of-the-art business and financial software applications; and o Appropriate maintenance of the Company's capital structure. ENERGY CONVERGENCE - Dynegy is continuing its expansion of ownership or commercial control of strategic assets and generating capacity in selected major market areas through acquisitions, greenfield development and asset management agreements in order to leverage its marketing and trading capabilities. Execution of this strategy began with the acquisition of Destec in 1997 and has accelerated with the acquisition of Illinova, the formation of a west coast generation venture and the greenfield projects that have been completed or are under construction. As discussed previously, the Company completed the acquisition of Illinova in early 2000 adding 4,989 megawatts of merchant generation capacity, strategically located in the mid-west, to its portfolio. In June 1999, the Company completed construction and began commercial operations of a 250 megawatt gas-fired merchant plant designed to assist in reducing power system congestion induced by peak electricity demands in the mid-west. Dynegy owns a 50 percent interest in this facility. In the second quarter of 1999, the Company completed a 33 36 restructuring of ownership interests in generation capacity owned jointly with an industry partner, through consolidation of four separate investments into a single joint venture. These assets represent over 1,200 megawatts of generation capacity located in southern California and the restructuring resulted in favorable financing and operating synergies. During 1999, the Company announced its intent to develop power generation projects in the following areas: Rockingham County, North Carolina; Lake Charles, Louisiana; Heard County, Georgia; Osceola County, Florida; Louisville, Kentucky; East Dundee, Illinois; and Channelview, Texas. These facilities will add an additional 2,710 megawatts of generation capacity to Dynegy's portfolio. The net additions to Dynegy's portfolio were tempered somewhat by the aforementioned disposition of the qualifying facilities. However, the sale of these assets, which did not consist of merchant generation capacity, is not expected to be significant to the Company's execution of its long-term strategy. Finally, consistent with our stated strategy and as a result of the long lead time required by industry manufacturers, the Company has executed or is currently negotiating purchase orders to acquire in excess of forty state-of-the-art gas-fired turbines, representing approximately 6,900 megawatts of capacity. Delivery of the manufactured turbines will occur ratably beginning in 1999 and ending in 2003. The timing of delivery of these turbines coincides with Dynegy's capital asset program, which is linked to our goal of owning or controlling 70,000 megawatts of generation capacity within five years. During 1999, Dynegy continued its focus on higher margin business in its gas and power marketing operations. The execution of this strategy was enhanced by the marketing, trading and arbitrage opportunities provided by the control and optimization of physical assets. Also in 1999, Dynegy expanded its trading and marketing strategy by adding power marketing operations to its existing gas marketing operations in the UK. This business is beginning to expand into Europe beginning with trading operations in the Nord Pool and office expansions in continental Europe. The acquisition of Illinova brings together two diverse retail gas and power marketing strategies that we believe complement each other. Dynegy will continue to execute its retail gas and electric strategy, which is designed to access a significant national customer base while mitigating the large capital investment and financial risks necessitated by other national retail marketing strategies. However, where commercial synergies exist, Dynegy will leverage off the existing Illinova operations in order to maximize returns from its retail strategy, without altering the overall risk profile of this business. MIDSTREAM SEGMENT - During 1999, the Midstream segment continued execution of the restructuring and rationalization of its operations that were begun in 1997. The segment's businesses were able to achieve first quartile operating performance through efficiency improvements and cost reductions that enhanced its competitive position in the marketplace. These businesses increased their focus on extracting fee income throughout the value chain, unbundling services and leveraging off the Company's commercial skills and relationships. In addition, the segment businesses focused efforts on re-negotiating or restructuring marginally profitable contractual arrangements in order to position these businesses for profitable growth. Finally, the segment continued to invest in strategically located midstream assets in order to advance existing commercial advantages or to leverage off identified economies of scale, while divesting itself of under-performing assets. The intent of these initiatives is to mitigate the variability that commodity prices have on the operating results of the segment, as well as to position the segment's businesses to take full advantage of improvements in market conditions when they occur. For the foreseeable future, Dynegy will focus its operations and capital expansion towards infrastructure and opportunities present in the western Gulf of Mexico area, stretching from Mont Belvieu, Texas to Mississippi, and in other areas Management views as strategic. Dynegy believes that existing owned infrastructure and commercial acumen uniquely positions the Company to exploit opportunities in both the domestic and world-wide liquids marketing and trading business. Dynegy will continue to focus on reducing commodity volatility exposure, while maintaining first quartile operating efficiency with an operational emphasis on downstream marketing and trading. TECHNOLOGY INFRASTRUCTURE ENHANCEMENTS - Dynegy has continued its three-year plan, launched in 1998, to enhance our competitiveness through technology infrastructure improvements aimed at optimizing major business and financial processes at the Company. Using state-of-the-art technology and software applications, the project team is focused on process enhancements 34 37 extending throughout the organization, linking initial price and market discovery with risk control, production, aggregation, distribution, cash settlement, accounting and financial statement recognition. As an integral part of this three-year plan, management is defining and executing an end-to-end eBusiness Strategy, having the intent of placing Dynegy at the forefront of our industry as it relates to this technological advancement. Dynegy believes that eCommerce is fast becoming the primary business enabler in our industry resulting in a paradigm shift in how business is conducted. Management believes that opportunities existing from application of this technology are significant and that a successful execution of a comprehensive strategy is paramount to maximizing our stated goals and strategies. CAPITAL MAINTENANCE - During 1999 and into 2000, the Company managed its consolidated capital structure providing capital for the acquisition of Illinova, the formation of the West Coast Power generation joint venture under favorable terms and providing capital for the execution of its aggressive capital investment program. The Company was granted an investment grade credit rating following the acquisition of Illinova with no diminution of previous ratings, despite an increase in indebtedness required to execute the transaction. Dynegy anticipates a sale of common equity in the first half of 2000 that, when combined with proceeds from the sale of non-strategic assets, should provide a debt to capital ratio consistent with historic norms. IMPACT OF PRICE FLUCTUATIONS Dynegy's operating results are impacted by commodity price, interest rate and foreign exchange rate fluctuations. The Company routinely enters into financial instrument contracts to hedge purchase and sale commitments, fuel requirements and inventories in its natural gas, natural gas liquids, crude oil, electricity and coal businesses in order to minimize the risk of market fluctuations. As a result of marketplace liquidity and other factors, the Company may, at times, be unable to fully hedge its portfolio for certain market risks. Dynegy also monitors its exposure to fluctuations in interest rates and foreign currency exchange rates and may execute swaps, forward-exchange contracts or other financial instruments to manage these exposures. The Energy Convergence segment includes the integrated component businesses: wholesale gas marketing, wholesale power marketing and power generation. Operating margins earned by wholesale gas and power marketing, exclusive of risk-management activities, are relatively insensitive to commodity price fluctuations since most of the purchase and sales contracts do not contain fixed-price provisions. Generally, prices contained in these contracts are tied to a current spot or index price and, therefore, adjust directionally with changes in overall market conditions. However, market price fluctuations for natural gas and electricity can have a significant impact on the operating margin derived from risk-management activities in these businesses. Dynegy generally attempts to balance its fixed-price physical and financial purchase and sales commitments in terms of contract volumes, and the timing of performance and delivery obligations. To the extent a net open position exists, fluctuating commodity market prices can impact Dynegy's financial position or results of operations, either favorably or unfavorably. The net open positions are actively managed, and the impact of changing prices on the Company's financial condition at a point in time is not necessarily indicative of the impact of price movements throughout the year. Historically, fuel costs, principally natural gas, represented the primary variable cost impacting the financial performance of the Company's investment in power generating facilities. Operating margins at these facilities were relatively insensitive to commodity price fluctuations since most purchase and sales contracts contained variable power sales contract features tied to a current spot or index natural gas price, allowing revenues to adjust directionally with changes in natural gas prices. However, the Company's investment strategy, which emphasizes growth of merchant generation capacity, is altering the makeup of its generation asset portfolio. The growth of merchant generation capacity as a percentage of total available capacity increases the Company's exposure to commodity price risk. The financial performance and cash flow derived from merchant generation capacity is impacted, either favorably or unfavorably, by changes in and the relationship between natural gas and electricity prices. The Company actively manages the price risks described above and may, at times, have a bias in the market, within established guidelines, resulting from management of its portfolio. Operating margins associated with the Midstream segment's natural gas gathering, processing and fractionation activities are very sensitive to changes in natural gas liquids prices and the availability of inlet 35 38 volumes. The impact from changes in natural gas liquids prices results principally from the nature of contractual terms under which natural gas is processed and products are sold. In addition, certain of the Midstream businesses' processing plant assets are impacted by changes in, and the relationship between, natural gas and natural gas liquids prices which, in turn influences the volumes of gas processed. Commodity price fluctuations may also affect the operating margins derived from the Company's natural gas liquid marketing business. Based upon current levels of natural gas processing activities and industry fundamentals, the estimated impact on annual operating margins of each one-cent movement in the annual average price of natural gas liquids approximates $6 to $8 million. The availability of inlet volumes directly affects the utilization and profitability of the segment's businesses throughout the Liquids Value Chain. The acquisition of inlet volumes is highly competitive and the availability of such volumes to industry-wide participants is also impacted by price variability. Unilateral decisions made by producers to shut-in production or otherwise curtail workovers, reduce well maintenance activities and/or delay or cancel drilling activities, as a result of depressed commodity prices or other factors, negatively affects production available to the entire midstream industry. Because such decisions are based upon the pricing environment at any particular time, management cannot predict with precision the impact that such decisions may have on its business. OPERATIONS RISK Dynegy's stated business strategy is to expand ownership or control of merchant generation capacity in select markets across the country. As Dynegy moves forward with the execution of its strategic plan to own or control 70,000 megawatts of capacity within five years, risk of earnings volatility increases through exposure to unanticipated variability in generation capacity dependability factors. The increasing importance of and dependency upon physical generation of electricity as a percentage of Dynegy's overall portfolio and strategy may substantially alter Dynegy's earnings risk profile over time. Many of the implied risks associated with ownership and control of generation capacity may not be fully mitigated through application of risk management methods and/or state-of-the-art, first quartile power generation operating methods. The addition of generation assets to Dynegy's portfolio may increase enterprise exposure to environmental and regulatory laws and regulations. These exposures could result in increased expenditures for capital improvements to meet certain statutory requirements and could result in expenditures for remediation of unanticipated environmental contamination. The potential redirection of capital to these types of expenditures could reduce the level of available discretionary capital currently anticipated to be used in executing Dynegy's strategic plan in future periods. SEASONALITY Dynegy's revenue and operating margin are subject to fluctuations during the year, primarily due to the impact certain seasonal factors have on sales volumes and the prices of natural gas, electricity and natural gas liquids. Natural gas sales volumes and operating margin are typically higher in the winter months than in the summer months, reflecting increased demand due to greater heating requirements and, typically, higher natural gas prices. However, as a result of the industry-wide emphasis on the growth of gas-fired generation, historical seasonality associated with natural gas sales volumes and prices may become less pronounced in the future. Conversely, power marketing operations are typically impacted by higher demand and commodity price volatility during the summer cooling season. Consistent with power marketing, the Company's electricity generating facilities generally experience peak demand during the summer cooling season, particularly for merchant plant generating facilities. Partly as a result of Dynegy's emphasis on merchant power generation, revenue and operating margin may vary, either positively or negatively, as weather driven demand varies from historic norms. The Midstream Businesses are also subject to seasonal factors; however, such factors typically have a greater impact on sales prices than on sales volumes. Natural gas liquids prices typically increase during the winter season due to greater heating requirements. The Company's wholesale propane business is seasonally weighted in terms of volume and price, consistent with the trend in the Company's natural gas operations, as a result of greater demand for crop-drying and space-heating requirements in the fall and winter months. EFFECT OF INFLATION Although Dynegy's operations are affected by general economic trends, management does not believe inflation has had a material effect on the Company's results of operations. 36 39 LIQUIDITY AND CAPITAL RESOURCES The Company's business strategy has historically focused on acquisitions or construction of core operating facilities in order to capture significant synergies existing among these types of assets and Dynegy's natural gas, power and natural gas liquids marketing businesses. For the foreseeable future, the Company's primary focus will be the acquisition and/or construction of power generating assets that will enable the Company to fully realize the Merchant Leverage Effect of commercialization of these generating assets. The Company's energy convergence strategies are focused on marketing, trading and arbitrage opportunities involving natural gas and power, centered around the control and optimization of Btu conversion capacity within the wholesale gas and power businesses. Dynegy has historically relied upon operating cash flow and borrowings from a combination of commercial paper issuances, money market lines of credit, corporate credit agreements and various public debt issuances for its liquidity and capital resource requirements. The following briefly describes the terms of these arrangements. COMMERCIAL PAPER AND MONEY MARKET LINES OF CREDIT The Company uses commercial paper proceeds and borrowings under uncommitted money market lines of credit for general corporate purposes, including short-term working capital requirements. The Company maintains a commercial paper program for amounts up to $800 million, as supported by its corporate credit agreements. At December 31, 1999, approximately $456 million of commercial paper was outstanding and $40 million was outstanding under existing money market lines of credit. CORPORATE CREDIT AGREEMENTS Dynegy's corporate credit agreements are comprised of a $400 million, five-year revolving credit agreement maturing in May 2003, and a $400 million, 364-day revolving credit agreement maturing in May 2000. Both agreements provide funding for working capital, letters of credit and other general corporate expenditures. At December 31, 1999, letters of credit and borrowings under the corporate credit agreements aggregated $36 million and, after consideration of the outstanding commercial paper, aggregate unused borrowing capacity under the corporate credit agreements approximated $267 million. CANADIAN CREDIT FACILITY In November 1998, an indirect wholly-owned Canadian subsidiary of the Company entered into a $60 million, two-year revolving credit facility maturing in November 2000. Borrowings under this agreement may be used for general corporate purposes. At December 31, 1999, $40 million was outstanding under this agreement. PUBLIC DEBT The Company has five separate public debt issues aggregating $900 million, which mature in 2002, 2005, 2006, 2018 and 2026, respectively. Net proceeds derived from these issues were used to reduce outstanding borrowings under credit arrangements existing at the date of each respective issuance. NON-RECOURSE DEBT The consolidated debt balance includes three notes aggregating $89 million. These notes have recourse only to the assets of identified power generation projects. Each of the three notes represents a fifteen-year term loan obligation payable in semi-annual installments of principal plus accrued interest. These notes are related to the Qualifying Facilities that were sold in February, 2000. PREFERRED SECURITIES OF SUBSIDIARY TRUST NGC Corporation Capital Trust I ("Trust"), a wholly owned subsidiary of Dynegy, issued in a private transaction $200 million aggregate liquidation amount of 8.316% Subordinated Capital Income Securities (referred to herein as "Securities") representing preferred undivided beneficial interests in the assets of the Trust. The Trust invested the proceeds from the issuance of the Trust Securities in an equivalent amount of 8.316% Subordinated Debentures ("Subordinated Debentures") of the Company. The sole assets of the Trust are the Subordinated 37 40 Debentures. Following the issuance of the Securities, the Trust completed an exchange offer through which all of the outstanding Securities were exchanged by the holders thereof for registered securities having substantially the same rights and obligations. OTHER MATTERS STOCKHOLDER ISSUES. Effective with the execution of the acquisition of Illinova, BG and NOVA each reduced their stakes in Dynegy to below 5 percent by accepting $16.50 cash per share for a significant portion of their previous aggregate common stock ownership in Dynegy Holding. Further, Dynegy granted both BG and NOVA registration rights for shares of Series A Convertible Preferred Stock and shares of Class A common stock issued or issuable upon conversion of the Series A Convertible Preferred Stock held by each following execution of the merger. Finally, BG and NOVA were granted rights to obligate Dynegy to initiate a registered public offering for all shares requested to be sold by BG and NOVA, subject to certain conditions precedent. Pursuant to the terms of the merger agreement, Chevron maintained a 28 percent equity stake in Dynegy. Further, in accordance with a shareholder agreement, Chevron was granted certain rights pursuant to its ownership of all of the Class B common shares of Dynegy. ACQUISITION AND CONSTRUCTION PROJECTS. Included in the 2000 budget is $873 million committed to construction projects in progress, identified asset acquisitions, maintenance capital projects, environmental projects, technology infrastructure and software enhancements, contributions to equity investments and certain discretionary capital investment funds. The capital budget is subject to revision as unforeseen opportunities or circumstances arise. Funds committed to the various segments in 2000 are as follows:
=================================================================================================== CAPITAL BUDGET FOR 2000 ACQUISITION AND CONSTRUCTION PROJECTS =================================================================================================== ESTIMATED CAPITAL SEGMENT SPENDING -------------------------------------------------------------- ------------------ ($ IN THOUSANDS) Energy Convergence: Power Generation $ 450,000 Marketing and Trade 50,000 Illinois Power 178,000 Midstream Segment 110,000 Information Technology Infrastructure and Software and 85,000 -------------- Other $ 873,000 ============== ===================================================================================================
COMMITMENTS. In conducting its operations, the Company routinely enters into agreements that commit future cash flow to the lease and or acquisition of assets used in its businesses. These commitments are typically associated with capital projects, reservation charges for storage and transportation capacity, office and equipment leases and other similar items. The terms of these agreements vary based on the nature and intent of each transaction. The following describes the more significant commitments outstanding at December 31, 1999. The Company is engaged in a continuous capital asset expansion program consistent with its business plan and energy convergence strategies. The emphasis of this capital asset program is on the acquisition or construction of strategically located power generation assets. Consistent with this strategy and as a result of the long lead time required by industry manufacturers, a subsidiary of the Company has executed or is currently negotiating purchase orders to acquire in excess of forty state-of-the-art gas-fired turbines representing approximately 6,900 megawatts of generating capacity. These purchase orders represent a capital commitment of approximately $1.3 billion. Delivery of the manufactured turbines will occur ratably through 2003. Commitments under these purchase orders are generally payable consistent with the delivery schedule. The purchase orders include milestone requirements by the manufacturer and provide Dynegy with the ability to cancel each discrete purchase order commitment in exchange for a fee, which escalates over time. The capital asset program is subject to periodic review and revision, and the actual number of 38 41 projects and aggregate cost for such projects will be dependent on various factors including available capital resources, market conditions, legislative actions, load growth, changes in materials, supplies and labor costs and the identification of partners in order to spread investment risk. The Company routinely enters into supply and market contracts for the purchase and sale of electricity, some of which contain fixed capacity payments. Obligations under these supply contracts, which are not already fair valued on the balance sheet at December 31, 1999, totaled $212 million on a discounted basis. Such obligations are generally payable on a ratable basis, the term of which extends through 2011. In return for such fixed capacity payments, Dynegy receives volumes of electricity at agreed prices, which it then may re-market. Based on year-end estimates, the market value of electricity available for sale under these contracts exceeds the cost of such electricity, which amount includes the fixed capacity payments disclosed herein. In October 1999, the Company announced that it had achieved all of the necessary approvals to begin construction on its Heard County Power Project, a 500-megawatt natural gas-fired, simple-cycle peaking facility located in Franklin in Heard County, Georgia. A Dynegy subsidiary will design and construct the generating facility, as agent for a third party, and Dynegy is obligated to guarantee approximately 90 percent of the actual cost of the project during the construction phase. It is anticipated that Dynegy will subsequently lease the completed facility from that third party for an initial term of five years. Under certain circumstances, the Company maintains an option to purchase the facility from the third party and it may participate in the outright sale of the asset. A wholly owned subsidiary of the Company leases a power generating asset under an agreement that is classified as an operating lease. This agreement has aggregate future minimum lease payments of approximately $7.1 million at December 31, 1999. DIVIDEND REQUIREMENTS. In 2000, Dynegy's Class A and Class B common stock will be entitled to a $0.60 per share dividend if, when and as declared by the Board of Directors of the Company out of funds legally available therefor. The Class B common stock has certain conversion features and maintains certain preemptive rights under the shareholder agreement. The holders of the Series A Convertible Preferred Stock are entitled to receive dividends or distributions totaling $3.00 per share annually if and when declared by the Board of Directors of the Company out of funds legally available therefor. Dividends on the preferred shares are cumulative from the date of issuance and are payable quarterly on the last day of March, June, September and December. The preferred stock carry certain priority, liquidation, redemption, conversion and voting rights not available to the common shareholders. STOCK REPURCHASE PLAN. The Company has a stock repurchase program, approved by the Board of Directors, that allows it to repurchase, from time to time, up to 1.6 million shares of common stock (1.1 million shares on an adjusted basis pursuant to the Illinova acquisition) in open market transactions. At December 31, 1999, approximately 399,000 shares (276,000 shares on an adjusted basis pursuant to the Illinova acquisition) remained available for repurchase under this program. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES. The Company is exposed to certain market risks inherent in the Company's financial instruments, which arise from transactions entered into in the normal course of business. The Company routinely enters into financial instrument contracts to hedge purchase and sale commitments, fuel requirements and inventories in its natural gas, natural gas liquids, crude oil, electricity and coal businesses in order to minimize the risk of market fluctuations. Dynegy also monitors its exposure to fluctuations in interest rates and foreign currency exchange rates and may execute swaps, forward-exchange contracts or other financial instruments to hedge and manage these exposures. The absolute notional contract amounts associated with commodity risk-management, interest rate and forward exchange contracts, respectively, were as follows: 39 42
============================================================================================================ ABSOLUTE NOTIONAL CONTRACT AMOUNTS ============================================================================================================ DECEMBER 31, ----------------------------------------------- 1999 1998 1997 -------------- ------------- ------------- Natural Gas (Trillion Cubic Feet) 5.702 4.179 2.558 Electricity (Million Megawatt Hours) 42.949 1.835 2.244 Natural Gas Liquids (Million Barrels) 19.902 6.397 4.355 Crude Oil (Million Barrels) 35.554 18.800 14.920 Interest Rate Swaps (in thousands of US Dollars) $ 36,524 $ 69,332 $ 180,000 Fixed Interest Rate Paid on Swaps (Percent) 8.210 8.067 6.603 U.K. Pound Sterling (in thousands of US Dollars) $ 85,812 $ 69,254 $ 74,638 Average U.K. Pound Sterling Contract Rate (in US Dollars) $ 1.6191 $ 1.6143 $ 1.5948 Canadian Dollar (in thousands of US Dollars) $ 288,898 $ 268,307 $ 37,041 Average Canadian Dollar Contract Rate (in US Dollars) $ 0.6775 $ 0.6710 $ 0.7240 ============================================================================================================
Cash-flow requirements for these commodity risk-management, interest rate and foreign exchange contracts were estimated based upon market prices in effect at December 31, 1999. Cash-flow requirements were as follows:
====================================================================================================================== CASH FLOW REQUIREMENTS FOR RISK MANAGEMENT CONTRACTS ====================================================================================================================== 2000 2001 2002 2003 2004 BEYOND ----------- ----------- ----------- ------------ ------------ ------------ ($ IN THOUSANDS) Future estimated net inflows (outflows) based on year end market prices/rates $ 33,893 $ 13,735 $ 13,958 $ 13,711 $ 12,447 $ 6,446 =========== =========== =========== ============ ============ ============ ======================================================================================================================
Dynegy measures entity-wide market risk in its financial trading and risk-management portfolios using value at risk. The quantification of market risk using value at risk provides a consistent measure of risk across diverse energy markets and products with different risk factors in order to set the overall corporate risk tolerance, to determine risk targets, and to set position limits. The use of this methodology requires a number of key assumptions including the selection of a confidence level and the holding period to liquidation. Dynegy relies on value at risk to determine the maximum potential reduction in the trading portfolio value allowed within a given probability over a defined period. Because of limitations to value at risk, Dynegy uses other means to monitor market risk in the trading portfolios. In addition to value at risk, Dynegy performs regular stress and scenario analysis to measure extreme losses due to exceptional events. The value at risk and stress testing results are reviewed to determine the maximum allowable reduction in the total equity of the commodity portfolios. Additional measures are used to determine the treatment of risks outside the value at risk methodologies, such as market volatility, liquidity, event and correlation risk. Dynegy estimates value at risk using a JP Morgan RiskMetrics TM approach assuming a one-day holding period and a 95 percent confidence level. At December 31, 1999, the value at risk for Dynegy's trading and risk-management portfolios approximated $5.8 million and the average of such value during the year ended December 31, 1999 was estimated at $4.8 million. ACCOUNTING PRONOUNCEMENTS. Effective January 1, 1999, the Company adopted the provisions of Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities" ("EITF 98-10") pursuant to the implementation requirements stated therein. The resulting effect of adoption of the provisions of EITF 98-10 was to alter the Company's comprehensive method of accounting for energy-related contracts, as defined in that statement. The cumulative effect of this change in accounting principle was not material to the 1999 results of operations. The pro forma effect on prior periods of the adoption of the provisions of EITF 98-10 was not determinable. Previously, only North American fixed-price natural gas transactions were measured at fair value, net of future servicing costs and reserves as estimated by the Company. The Company now accounts for all energy trading activities at fair value as of each balance sheet date and recognizes currently the net gains or losses resulting from the revaluation of these contracts to market in its results of operations. As a result, substantially all of the operations of the Company's world-wide gas marketing, power marketing, and crude marketing operations are now accounted for under a mark-to-market accounting methodology. Generally, revenue recognition for the Company's natural gas liquids 40 43 processing, fractionation, transportation and marketing activities, as well as its power generation businesses, remain on an accrual-based accounting methodology. Sales and purchases by these businesses are not trading operations, as defined in the statement, and therefore not subject to the provisions of EITF 98-10. The Company continues to analyze the effects of adoption of the rules promulgated by Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement No. 133"). Provisions in Statement No. 133 will affect the accounting and disclosure of contractual arrangements and operations of the Company. The Financial Accounting Standards Board recently deferred implementation of the provisions of Statement No. 133 to fiscal periods beginning after June 15, 2000. Dynegy intends to adopt the provisions of Statement No. 133 within the timeframe and in accordance with the requirements provided by that statement. Management is currently assessing the financial statement impact; however, such impact is not determinable at this time. Management believes the adoption of the provisions of EITF 98-10 and Statement No. 133 may affect the variability of future periodic results reported by Dynegy, as well as its competitors, as market conditions and resulting trading portfolio valuations change from time to time. Such earnings variability, if any, will likely result principally from valuation issues arising from imbalances between supply and demand created by illiquidity in certain commodity markets resulting from, among other things, a lack of mature trading and price discovery mechanisms, transmission and/or transportation constraints resulting from regulation or other issues in certain markets and the need for a representative number of market participants maintaining the financial liquidity and other resources necessary to compete effectively. YEAR 2000 ISSUES. Dynegy completed all phases of the Year 2000 Program relative to computer systems and technology infrastructure considered essential to the Company's business prior to the event. The year 2000 event passed without significant incident. Dynegy's contingency plans are designed to minimize any disruptions or other adverse effects resulting from unexpected incompatibilities regarding core systems and business applications and to facilitate the early identification and remediation of system problems that manifest themselves after December 31, 1999. To date, no significant items have been identified. Dynegy continues to assess, test and remediate business applications and technology infrastructure that were previously determined to be other than essential to core business operations. The extent of these activities is very insignificant to Dynegy's overall business. Aggregate costs expended for the Year 2000 Project totaled $6 million. Approximately $2 million of this amount was expended during 1998 with an additional $4 million expended in 1999. ENVIRONMENTAL MATTERS. Dynegy's operations are subject to extensive federal, state, provincial and local statutes, rules and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Compliance with these statutes, rules and regulations requires capital and operating expenditures including those related to monitoring and permitting at various operating facilities and the cost of remediation obligations. The Company's environmental expenditures have not been prohibitive in the past, but are anticipated to increase in the future with the trend toward stricter standards, greater regulation, more extensive permitting requirements and an increase in the number of assets operated by the Company subject to environmental regulation. Dynegy's aggregate expenditures for compliance with laws and regulations related to the discharge of materials into the environment or otherwise related to the protection of the environment approximated $4 million in 1999. The addition of fossil fuel-fired electric generation to Dynegy's portfolio, acquired in the Illinova acquisition, increases Dynegy's exposure to environmental regulation, as well as anticipated increased expenditures for remediation requirements and capital costs associated with Clean Air Act requirements and other federal and state legislation. Many of these exposures represent risks that Dynegy heretofore has not otherwise been subjected to. Management is confident that it has the resources in place to effectively manage the anticipated issues imposed by this heightened regulation and the financial liquidity to address anticipated expenditures associated with adherence to such regulation. Total environmental expenditures for both capital and operating maintenance and administrative costs are not expected to exceed $75 million in 2000 inclusive of the assets purchased in the Illinova acquisition. 41 44 CONCLUSION The Company continues to believe that it will be able to meet all foreseeable cash requirements, including expenditures associated with the Illinova acquisition, working capital, capital expenditures and debt service, from operating cash flow, supplemented by borrowings under its various credit facilities, if required. 42 45 RESULTS OF OPERATIONS The following table reflects certain operating and financial data for the Company's business segments for the years ended December 31, 1999, 1998 and 1997, respectively.
================================================================================================================================= DYNEGY'S OPERATING AND FINANCIAL DATA ================================================================================================================================= ENERGY CONVERGENCE MIDSTREAM ----------------------------------------- ------------------------------------------ 1999 1998 1997 1999 1998 1997 ----------- ------------- ----------- ------------- ------------ ------------ ($ IN THOUSANDS) Power Marketing and Generation $ 178,241 $ 106,216 $ 23,513 $ --- $ --- $ --- Natural Gas Marketing 105,353 130,059 103,292 --- --- --- Upstream Operations --- --- --- 122,844 91,472 206,564 Downstream Operations --- --- --- 123,870 91,802 51,425 Crude Oil Operations --- --- --- 13,567 9,138 500 Equity Investments 62,185 75,242 36,241 17,669 15,796 22,718 ----------- ------------- ----------- ------------- ------------ ------------ SUBTOTAL - FINANCIAL CONTRIBUTION (1) 345,779 311,517 163,046 277,950 208,208 281,207 Depreciation 35,116 29,026 16,425 94,342 84,176 87,966 General and Administrative 128,260 110,543 76,184 72,457 75,165 73,160 Impairment, Abandonment and Other --- 2,723 20,228 --- 6,921 254,772 Other Items 26,068 4,181 (2,770) 1,700 34,963 10,653 ----------- ------------- ----------- ------------- ------------ ------------ EARNINGS BEFORE INTEREST AND $ 208,471 $ 173,406 $ 47,439 $ 112,851 $ 76,909 $ (124,038) =========== ============= =========== ============= ============ ============ TAXES (2) NORMALIZED EBIT (3) $ 199,602 $ 176,129 $ 67,667 $ 112,851 $ 57,509 $ 130,734 =========== ============= =========== ============= ============ ============ OPERATING STATISTICS: Natural Gas Marketing (4) - US Sales Volumes 6.5 5.9 6.1 --- --- --- Canadian Sales Volumes 2.3 2.3 1.9 --- --- --- UK Sales Volumes 1.1 0.7 0.2 --- --- --- ----------- ------------- ----------- ------------- ------------ ------------ 9.9 8.9 8.2 --- --- --- =========== ============= =========== ============= ============ ============ Power Marketing (5) 66.5 120.8 94.7 --- --- --- Power Generation (6) - Gross 21.5 15.9 7.2 --- --- --- Net 12.8 9.8 4.3 --- --- --- NGLs Processed (7) - Field Plants --- --- --- 85.9 91.8 89.8 Straddle Plants --- --- --- 36.6 30.9 46.4 ----------- ------------- ----------- ------------- ------------ ------------ --- --- --- 122.5 122.7 136.2 =========== ============= =========== ============= ============ ============ NGL Gathering and Transmission (4) --- --- --- 0.2 0.3 0.4 Barrels Received for Fractionation (8) --- --- --- 210.9 192.5 201.3 NGL Marketing (8) --- --- --- 449.9 410.7 413.9 LPG Sales (8) --- --- --- 87.2 72.9 91.8 Crude Oil Marketing (8) --- --- --- 206.8 239.6 168.3
- ------------------------------------------ (1) Financial Contribution is the sum of the segment's operating margin and equity earnings from unconsolidated affiliates. (2) Earnings Before Interest and Taxes ("EBIT"), equals pretax earnings before deduction of interest expense. (3) Normalized EBIT adjusts EBIT for identified non-recurring items described in the following narrative on three-year results. (4) Billion Cubic Feet Per Day (5) Million Megawatt Hours (6) Million Megawatt Hours Generated (7) Thousand Barrels Per Day - Gross (8) Thousand Barrels Per Day 43 46 THREE YEARS ENDED DECEMBER 31, 1999 For the year ended December 31, 1999, the Company realized net income of $151.8 million, or $0.91 per diluted share. This compares with $108.4 million, or $0.66 per diluted share and a net loss of $102.5 million, or $0.68 per share in 1998 and 1997, respectively. The comparability of results period to period was impaired by the recognition of net non-recurring, after-tax gains totaling $5.8 million during 1999, after tax gains totaling $10.8 million during 1998, and net after-tax charges totaling $218.5 million recognized in 1997. In addition, the comparability of results for the three years is influenced by the Destec Acquisition that was effective July 1, 1997. Revenues in each of the three years in the period ended December 31, 1999, totaled $15.4 billion, $14.3 billion, and $13.4 billion, respectively. Operating cash flows totaled $8.8 million for the year ended December 31, 1999, compared with operating cash inflows of $250.8 million in 1998 and $278.6 million in 1997. Non-recurring items in the current period relate to a $5.8 million after-tax gain on the sale of an investment. In 1998 non-recurring items included a $17.1 million after-tax gain on the sale of Ozark offset by a $6.3 million after-tax severance charge. The 1997 loss included one-time charges principally associated with the abandonment and impairment of certain operating and non-operating assets, inventory obsolescence and lower-of-cost-or-market writedowns, reserves for contingencies and other obligations, a charge for a hedging related loss and a charge associated with a change in the method of accounting for certain business process re-engineering and information technology transformation costs. After consideration of the non-recurring items described above, Dynegy's normalized net income for the year ended December 31, 1999, approximated $146.0 million, or $0.87 per diluted share, compared with normalized net income of $97.5 million, or $0.59 per diluted share in 1998, and $108.7 million, or $0.65 per diluted share, in 1997. The lower normalized results in 1998 as compared with the other two years generally reflect a material increase in earnings derived from the Company's Energy Convergence segment offset by the significant negative impact that crude and NGL commodity prices had on the Midstream segment in 1998, as well as a trend towards higher overhead, depreciation and interest costs during the three-year period. Consolidated operating margin for each of the three years in the period ended December 31, 1999, totaled $543.9 million, $428.7 million and $385.3 million, respectively. For the year ended December 31, 1999, the Company reported operating income of $213.7 million, compared with operating income of $120.1 million and an operating loss of $143.4 million for the 1998 and 1997 periods, respectively. Operating income in both the 1998 and 1997 periods was negatively impacted by the pre-tax effect of portions of the aforementioned non-recurring items. The increase in depreciation and amortization expense during the three-year period reflects the depreciable assets acquired in the Chevron Combination and the Destec Acquisition as well as the continued expansion of the Company's depreciable asset base through other asset acquisitions and capital projects completed during the three-year period. Depreciation and amortization expense in the 1999 and 1998 periods benefited from the prospective effect of the asset impairments and abandonments recognized in 1997. The increased level of general and administrative expenses period-to-period principally reflects the incremental costs associated with a larger, more diverse base of operations, non-capitalizable consulting and other costs required to support technology infrastructure improvements, higher variable compensation costs in 1999 than in 1998 or 1997 and, to a lesser degree, expenses related to identifying and resolving Year 2000 issues. During the three-year period ended December 31, 1999, the Company significantly increased its investment in unconsolidated affiliates, principally as a result of the ownership interests and legal structures employed in a majority of the investments made by the Energy Convergence segment. As a result, the financial results of Dynegy's equity investments to its consolidated operating results have become more significant. The Company has structured these investments to mitigate financial risk to the corporation. In addition, the bylaws of a majority of these investments require periodic cash distributions allowing Dynegy to manage its share of cash flow generated by these investments in an efficient manner. The Company's equity share in the earnings of its unconsolidated affiliates contributed an aggregate $79.9 million to 1999 pre-tax results, compared to $91.0 million in 1998 and $59.0 million in 1997. Equity earnings in 1999 were lower than in 1998 principally in the generation investment equity earnings group reflecting weather driven demand differences between periods and higher interest costs in 1999 associated with the formation of a new partnership. Cash distributions received from these investments during each of the three years in the period ended December 31, 1999 approximated $66 million, $85 million and $55 million, respectively. The following table provides a summary of equity earnings by investment for the comparable periods: 44 47
============================================================================================ DYNEGY'S EQUITY EARNINGS FROM UNCONSOLIDATED AFFILIATES ============================================================================================ YEARS ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 ---------- ---------- --------- ($ IN THOUSANDS) Accord Energy Limited (1) $ 21,009 $ 21,822 $ 25,885 Other Gas Marketing Investments, Including NCL (1) (5,980) (3,469) (2,942) Electric Power Marketing Investments 659 509 518 Power Generation Investments 46,497 56,380 12,780 Gulf Coast Fractionators 3,534 3,741 6,624 West Texas LPG Pipeline Limited Partnership 5,066 6,428 7,162 Venice Energy Services Company, L.L.C. 6,812 4,310 8,052 Other Midstream Businesses Investments, net 2,257 1,317 880 ---------- ---------- --------- $ 79,854 $ 91,038 $ 58,959 ========== ========== ========= ============================================================================================
1. For a discussion of the Accord and NCL restructurings, refer to Note 11 of the Consolidated Financial Statements. Interest expense totaled $78.2 million for the year ended December 31, 1999, compared with $75.0 million and $63.5 million for the comparable 1998 and 1997 periods. The higher interest expense period to period is attributed to higher average outstanding principal amounts resulting primarily from debt assumed in and resulting from the Company's capital expenditure program, the Chevron Combination and the Destec Acquisition partially offset by interest rates that trended lower over the three-year period. Other income and expenses, net benefited operating results in each of the years ended 1999 by $27.8 million, $39.1 million and $7.9 million, respectively. In addition to the pretax effect of the previously mentioned non-recurring gain on sale of an investment, 1999's other income and expense, net included a $38 million pretax gain associated with the sale of an asset and a $23 million pretax reserve associated with the realization of certain assets. As a result, 1999 other income and expense, net benefited by approximately $15 million as a result of these items. Also, included in 1999's pretax earnings was a $15 million pretax reserve for under-realization on a long-term generation sales contract. Such amount was classified in operating margin. The effect of these three items on net income was immaterial in the period, and to the segment disclosures since all three items relate to Energy Convergence operations. Therefore, the items were not highlighted as non-recurring items in previous discussions on annual results. Each of the net amounts in 1998 and 1997 result principally from the pretax effect of certain of the aforementioned non-recurring items recognized in each period as well as numerous other less significant recurring and non-recurring income and expense items. During the second quarter of 1997, the Company sold $200 million aggregate liquidation amount of 8.316% Subordinated Capital Income Securities. Accumulated distributions associated with these Securities totaled $16.6 million for each of the years ended December 31, 1999 and 1998 and $9.8 million for the year ended December 31, 1997, respectively. The Company reported an income tax provision of $74.7 million in 1999, compared to an income tax provision of $50.3 million in 1998 and an income tax benefit of $62.2 million in 1997, reflecting effective rates of 33 percent, 32 percent and (41) percent, respectively. In general, differences between the aforementioned effective rates and the statutory rate of 35 percent result primarily from permanent differences attributable to amortization of certain intangibles, permanent differences arising from the effect of certain foreign equity investments and state income taxes. ENERGY CONVERGENCE - The Energy Convergence segment had earnings before interest and taxes ("EBIT") of $208.5 million for the year ended December 31, 1999, compared to $173.4 million in 1998, and $47.4 million in 1997. Normalized EBIT for each of the three years in the period ended December 31, 1999, totaled $199.6 million, $176.1 million and $67.7 million, respectively. These results were influenced, either positively or negatively, by: o lower demand for electricity in 1999 than in 1998, particularly in the southern California market, o favorable market movements in the United Kingdom in 1999 combined with significant growth in operations in the UK over the three year period, 45 48 o expansion of power trading to the UK and Europe in 1999, o increased gas and power marketing origination in 1999, o less price volatility in the North American power markets in 1999 and 1997 as compared to 1998, which reduced trading opportunities, o significant mild weather in 1999 and 1998 as compared with historical norms, o advertising costs by our retail alliances, o increased depreciation and general and administrative expenses reflecting the capital and overhead costs required to support the larger, more diverse base of operations, partially offset by o the acquisition of Destec and its power generation platform in 1997. Worldwide gas marketing operations were negatively influenced in all periods by unseasonably warm weather in the winter months that eliminated any significant volatility in commodity prices during those periods. Worldwide sales volumes totaled 9.9 Bcf/d in 1999, 8.9 Bcf/d in 1998 and 8.2 Bcf/d in 1997. Worldwide per-unit margins were $0.029, $0.040 and $0.035 for each of three years in the period ended December 31, 1999, respectively. The dramatic growth in financial contribution from the power marketing business in 1999 is attributable to favorable price movements in the United Kingdom and increased origination in the U. S. markets despite the lack of weather-driven volatility and trading opportunities during the year. This is in contrast to the financial contribution in 1998. Value extraction in that period was derived from the extreme market volatility experienced in certain U.S. markets, particularly in the mid-west, during the 1998 summer. Results in power generation reflect the execution of the Company's growth strategy over the three-year period. During this timeframe, gross generation production grew 14.3 million megawatt hours or nearly 200 percent. MIDSTREAM - The Midstream segment had earnings before interest and taxes ("EBIT") of $112.9 million for the year ended December 31, 1999, compared to $76.9 million in 1998, and a loss of $(124.0) million in 1997. Normalized EBIT for each of the three years in the period ended December 31, 1999, totaled $112.9 million, $57.5 million and $130.7 million, respectively. Improved natural gas liquids and crude oil prices, supplemented by targeted cost reductions and revenue enhancements favorably impacted this segment's results period-to-period. Sustained market price improvements in 1999 have resulted in increased gas processing, fractionation and trading opportunities. In addition, world demand for natural gas liquids strengthened in 1999, particularly in Europe and Asia enhancing revenues from global marketing operations. Forward sales of equity liquids production prevented this segment from fully realizing value during the upturn in commodity prices during 1999. This hedging technique has also been employed in 2000, resulting in the hedging of approximately 50 percent of 2000 equity production at a price above the historical ten-year mean propane price. Average NGL market prices averaged $0.34 per gallon in 1999 compared to $0.25 per gallon in 1998 and $0.34 per gallon in 1997. Likewise, crude oil prices improved during the year averaging $17.10 per barrel in 1999, $11.97 per barrel in 1998 and $18.64 per barrel in 1997. During 1998, the decline in NGL and crude oil commodity prices negatively impacted operations. During 1997, operating margins from these businesses were negatively impacted by high-cost inventory purchased during the fourth quarter of 1996, which was recognized in operating results during the first quarter of 1997, culminating in a lower-of-cost-or-market writedown of $12.3 million at March 31, 1997. Additionally, included in the 1997 period are pre-tax charges related to a lower-of-cost-or-market writedown of crude oil inventory of $2.7 million and a hedge-related loss of $8.3 million. Operationally, this segment's businesses continue to reflect a leadership position in significantly all domestic midstream businesses. Aggregate domestic natural gas liquids processing volumes totaled 122.5 thousand gross barrels per day in 1999 compared to an average 122.7 thousand gross barrels per day during 1998 and 136.2 thousand gross barrels per day in 1997. Volumes for 1999 and 1998 remain flat due to the rationalization of certain assets and the slow return of production volumes behind the field plants in 1999 resulting principally from the aforementioned producer behavior, offset by volumes received through an alliance with an industry partner. In 2000, natural gas processing volumes will be lower as a result of the aforementioned asset sales. The lower volumes in 1999 and 1998 as compared to 1997 reflect the economic decisions made during the 1998 period to reduce production at its straddle processing plants principally as a result of the relationship of natural gas and NGL commodity prices. Fractionation volumes and natural gas liquids marketing volumes averaged 210.9 and 537.1 thousand barrels per day, respectively, during 1999 reflecting significant increases over previous periods. The fractionation volumes increased principally as a result of the addition of the Lake Charles fractionator to the asset portfolio. The increases in trading and marketing 46 49 volumes reflect a more active world-wide trading and marketing presence as well as an increasing operational focus on this sector of the business. OPERATING CASH FLOW Cash flow from operating activities totaled $8.8 million during the year ended December 31, 1999 compared to $250.8 million during 1998 and $278.6 million during 1997. Changes in operating cash flow primarily reflect an increase in inventory and an increase in non-cash earnings resulting from risk management activities. Changes in other working capital accounts, which include prepayments, other current assets and accrued liabilities, reflect expenditures or recognition of liabilities for insurance costs, certain deposits, salaries, taxes other than on income, certain deferred revenue accounts and other similar items. Fluctuations in these accounts, period-to-period, reflect changes in the timing of payments or recognition of liabilities and are not directly impacted by seasonal factors. The 1997 period benefited from an advance payment for future gas deliveries. CAPITAL EXPENDITURES, COMMITMENTS AND DIVIDEND REQUIREMENTS CAPITAL EXPENDITURES AND INVESTING ACTIVITIES. During the year ended December 31,1999, the Company invested a net $318.7 million principally on power generation assets, including a power generation partnership, and additional expenditures related to maintenance capital improvements at existing facilities and capital investment associated with technology infrastructure improvements. During the year, the company sold certain Liquid's segment assets, an investment held by the Energy Convergence segment and a 50 percent interest in a power generation partnership, netting proceeds of $80.6 million. During the year ended December 31, 1998, the Company invested a net $295.1 million, principally on discrete asset acquisitions primarily focused in the Energy Convergence segment. Expenditures were also made to complete construction of the Lake Charles, Louisiana fractionator, for capital improvements at existing facilities and on capital additions at the Company's headquarters. During the period, the Company divested itself of its investment in Ozark, as well as certain non-strategic Midstream Segment assets. Aggregate net proceeds from these dispositions approximated $84 million. During the year ended December 31, 1997, the Company spent a net $510.7 million, principally on the Destec Acquisition, the purchase of NCL's gas marketing operations and on acquisitions of additional interests in gas processing facilities, pipelines and other midstream assets. Expenditures were also made on capital improvements at existing facilities and on capital additions at the Company's headquarters. The Company invested $27.7 million in its unconsolidated affiliates, principally for amounts committed to VESCO. During the period, the Company divested itself of the Mont Belvieu I fractionation facility pursuant to an agreement reached with the Federal Trade Commission related to the Chevron Combination. Further, Dynegy sold its 49.9 percent interest in NCL, as part of the restructuring of that investment and consummated the sales of certain non-strategic assets acquired in the Destec Acquisition. Aggregate net proceeds from these dispositions, plus proceeds from other immaterial dispositions, approximated $453 million. Dynegy acquired Destec on June 27, 1997, in a transaction valued at $1.26 billion, or $21.65 per share of Destec common stock. Concurrent with this acquisition, Dynegy sold Destec's international facilities and operations to The AES Corporation for $439 million. In July and August 1997, the Company sold Destec's interest in a partnership that owned a power generation facility and certain oil, gas and lignite reserves, respectively, for aggregate proceeds of $296 million. Proceeds from the sales of these non-strategic assets were used to retire debt incurred in the acquisition. DIVIDEND REQUIREMENTS AND STOCK REPURCHASES. Dynegy declares quarterly dividends on its outstanding common stock at the discretion of its Board of Directors. The holders of the Series A Preferred Stock were entitled to receive dividends or distributions equal per share in amount and kind to any dividend or distribution payable on shares of the Company's common stock, when and as the same are declared by the Company's Board of Directors. During the years ended December 31, 1999, 1998 and 1997, the Company paid approximately $8.1 million, $8.0 million and $7.9 million in cash dividends and distributions, respectively. In May 1997, the Board of Directors approved a stock repurchase program that allows the Company to repurchase, from time to time, up to 1.6 million shares of common stock in open-market transactions. The timing and number of shares ultimately repurchased will depend upon market conditions and consideration of alternative investments. Pursuant to this program, the Company acquired no shares in 1999 and 545,800 shares of its stock 47 50 through open-market trades during the year ended December 31, 1998. Shares were acquired in 1998 at a total cost of $6.9 million, or $12.65 per share on a weighted average cost basis. For the year ended December 31, 1997, the Company acquired 654,900 shares of its common stock in open-market transactions for an aggregate cost of $10.5 million, or $16.04 per share on a weighted average cost basis. UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION This Form 10-K contains various forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and information that are based on management's beliefs as well as assumptions made by and information currently available to management. When used in this document, words such as "anticipate", "estimate", "project", "forecast" and "expect" reflect forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable; it can give no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected. Among the key risk factors that may have a direct bearing on Dynegy's results of operations and financial condition are: o Competitive practices in the industries in which Dynegy competes; o Fluctuations in commodity prices for natural gas, electricity, natural gas liquids, crude oil or coal; o Fluctuations in energy commodity prices which could not or have not been properly hedged or that are inconsistent with Dynegy's open position in its energy marketing activities; o Operational and systems risks; o Environmental liabilities which are not covered by indemnity or insurance; o Software, hardware or third-party failures resulting from Year 2000 issues; o General economic and capital market conditions, including fluctuations in interest rates; and o The impact of current and future laws and governmental regulations (particularly environmental regulations) affecting the energy industry in general, and Dynegy's operations in particular. In addition, as it relates to the proposed Illinova combination, there can be no assurance that: o We have correctly identified and assessed all of the factors affecting Illinova's or Dynegy's businesses; o The available information with respect to these factors on which we have based our analysis is complete or correct; o Our analysis is correct; or o Our strategies, which are based in part on this analysis, will be successful. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and financial statement schedule of the Company are set forth at pages F-1 through F-36 inclusive, found at the end of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain of the information required by this Item 10 will be contained in the definitive Proxy Statement of the Company for its 2000 Annual Meeting of Stockholders (the "Proxy Statement") under the headings "Proposal 1 -- Election of Directors" and "Executive Compensation -- Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and 48 51 Exchange Commission not later than 120 days after December 31, 1999. Reference is also made to the information appearing in Part I of this Annual Report on Form 10-K under the caption "Item 1A. Executive Officers." ITEM 11. EXECUTIVE COMPENSATION Information with respect to executive compensation will be contained in the Proxy Statement under the heading "Executive Compensation" and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding ownership of certain of the Company's outstanding securities will be contained in the Proxy Statement under the heading "Principal Stockholders" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding related party transactions will be contained in the Proxy Statement under the headings "Principal Stockholders", "Proposal 1 -- Election of Directors" and "Executive Compensation -- Indebtedness of Management" and "-- Certain Relationships and Related Transactions" and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K The following documents, which have been filed by the Company with the Securities and Exchange Commission pursuant to the Securities and Exchange Act of 1934, as amended, are by this reference incorporated in and made a part of this statement: a. Financial Statements -- Consolidated financial statements of the Company and its subsidiaries are incorporated under Item 8. of this Form 10-K. b. Exhibits -- The following instruments and documents are included as exhibits to this Form 10-K.
EXHIBIT NUMBER DESCRIPTION 2.1 - Agreement and Plan of Merger among Dynegy Inc., Illinova Corporation and certain other parties named therein (15) 2.2 - Amendment to Agreement and Plan of Merger among Dynegy Inc., Illinova Corporation and other parties named therein (18) 2.3 - Combination Agreement and Plan of Merger, dated May, 22, 1996, by and between NGC Corporation, Chevron U.S.A. Inc. and Midstream Combination Corp.(7) 2.4 - Amendment to Combination Agreement, dated as of August 29, 1996, by and among NGC Corporation, Chevron U.S.A. Inc. and Midstream Combination Corp.(5) 2.5 - Agreement and Plan of Merger by and among Destec Energy, Inc., The Dow Chemical Company, NGC Corporation and NGC Acquisition Corporation II dated as of February 17, 1997. (8) 2.6 - Asset Purchase Agreement by and between NGC Corporation and The AES Corporation dated as of February 17, 1997. (8)
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EXHIBIT NUMBER DESCRIPTION 2.7 - First Amendment to Asset Purchase Agreement by and between NGC Corporation and The AES Corporation dated June 29, 1997.(9) 2.8 - Asset Purchase Agreement between Destec Energy, Inc. and ECT EOCENE Enterprises, Inc. dated July 1, 1997.(9) 3.1 - Articles of Incorporation of the Company (18) 3.2 - Articles of Amendment to the Company's Articles of Incorporation (18) 3.3 - Articles of Amendment to the Company's Articles of Incorporation (19) +3.4 - Amended and Restated Bylaws of Dynegy Inc. 3.5 - Statement of Resolution Establishing Series of Series A Convertible Preferred Stock filed with the Illinois Secretary of State on February 1, 2000. (19) 4.1 - Warrant exercisable for 6,228 shares of Common Stock of NGC Corporation registered in the name of J. Otis Winters. (2) 4.2 - Indenture, dated as of December 11, 1995, by and between NGC Corporation, the Subsidiary Guarantors named therein and the First National Bank of Chicago, as Trustee.(4) 4.3 - First Supplemental Indenture, dated as of August 31, 1996, by and among NGC Corporation, the Subsidiary Guarantors named therein, and The First National Bank of Chicago, as Trustee, supplementing and amending the Indenture dated as of December 11, 1995. (5) 4.4 - Second Supplemental Indenture, dated as of October 11, 1996, by and among NGC Corporation, the Subsidiary Guarantors named therein, and The First National Bank of Chicago, as Trustee, supplementing and amending the Indenture dated as of December 11, 1995. (5) 4.5 - Amended and Restated Credit Agreement dated as of June 27, 1997, among NGC Corporation and The First National Bank of Chicago, Individually and as Agent, The Chase Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents, and the Lenders Named therein.(9) 4.6 - First Amendment to Amended and Restated Credit Agreement, dated November 24, 1997, among NGC Corporation and The First National Bank of Chicago, Individually and as Agent, The Chase Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents for the Lenders named therein. (13) 4.7 - Second Amendment to Amended and Restated Credit Agreement, dated as of February 20, 1998, among NGC Corporation and The First National Bank of Chicago, Individually and as Agent, The Chase Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents for the Lenders named therein. (13) 4.8 - Subordinated Debenture Indenture between NGC Corporation and The First National Bank of Chicago, as Debenture Trustee, dated as of May 28, 1997. (10) 4.9 - Amended and Restated Declaration of Trust among NGC Corporation, Wilmington Trust Company, as Property Trustee and Delaware Trustee, and the Administrative Trustees named therein, dated as of May 28, 1997. (10) 4.10 - Series A Capital Securities Guarantee executed by NGC Corporation and The First National Bank of Chicago, as Guarantee Trustee, dated as of May 28, 1997. (10)
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EXHIBIT NUMBER DESCRIPTION 4.11 - Common Securities Guarantee of NGC Corporation dated as of May 28, 1997. (10) 4.12 - Registration Rights Agreement, dated as of May 28, 1997, among NGC Corporation, NGC Corporation Capital Trust I, Lehman Brothers, Salomon Brothers Inc. and Smith Barney Inc. (10) 4.13 - Second Supplemental Indenture among NGC Corporation, Destec Energy, Inc. and The First National Bank of Chicago, as Trustee, dated as of June 30, 1997, supplementing and amending the Indenture dated as of June 30, 1997. (11) 4.14 - Fourth Supplemental Indenture among NGC Corporation, Destec Energy, Inc. and The First National Bank of Chicago, as Trustee, dated as of June 30, 1997, supplementing and amending the Indenture dated as of December 11, 1995. (11) 4.15 - Fifth Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee, dated as of September 30, 1997, supplementing and amending the Indenture dated as of December 11, 1995. (13) 4.16 - Sixth Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee, dated as of January 5, 1998, supplementing and amending the Indenture dated as of December 11, 1995. (13) 4.17 - Seventh Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee, dated as of February 20, 1998, supplementing and amending the Indenture dated as of December 11, 1995. (13) 4.18 - Indenture, dated as of September 26, 1996, restated as of March 23, 1998, to include amendments in the First through Fifth Supplemental Indentures, between NGC Corporation and The First National Bank of Chicago, as Trustee. (13) 4.19 - Credit Agreement dated as of May 27, 1998, among NGC Corporation and The First National Bank of Chicago, Individually and as Administrative Agent, The Chase Manhattan Bank, Individually and as Syndication agent and NationsBank, N.A., Individually and as Documentation Agent and the Lenders named therein. (12) 4.20 - 364-Day Revolving Credit Agreement dated as of May 27, 1998, among NGC Corporation and The First National Bank of Chicago, Individually and as Administrative Agent, The Chase Manhattan Bank, Individually and as Syndication agent and NationsBank, N.A., Individually and as Documentation Agent and the Lenders named therein. (12) 4.21 - First Amendment to 364-Day Revolving Credit dated as of May 5, 1999 among Dynegy Inc. and The First National Bank of Chicago, Individually and as Administrative Agent, The Chase Manhattan Bank, Individually and as Syndication Agent, and Citibank N.A., Individually and as Documentation Agent and the Lenders Named therein. (17) 10.1 - Agreement of Sale and Purchase of Assets, dated as of May 5, 1991, as amended on June 6, 1991 and August 30, 1991, by and between OXY USA Inc. and Trident Energy, Inc. (1) 10.2 - Master Agreement on Gas Processing, dated as of May 5, 1991, by and between OXY USA Inc. and Trident NGL, Inc.(1) 10.3 - Dynegy Inc. Amended and Restated 1991 Stock Option Plan. (16) 10.4 - Dynegy Inc. 1998 U.K. Stock Option Plan (16)
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EXHIBIT NUMBER DESCRIPTION 10.5 - Dynegy Inc. Amended and Restated Employee Equity Option Plan. (16) +10.6 - Dynegy Inc. 1999 Long Term Incentive Plan. +10.7 - Dynegy 2000 Long Term Incentive Plan. 10.8 - Employment Agreement dated April 2, 1996 by and between NGC Corporation and Stephen A. Furbacher.(6) +10.9 - Employment Agreement, effective February 1, 2000, between Charles L. Watson and Dynegy Inc. +10.10 - Employment Agreement, effective February 1, 2000, between Stephen W. Bergstrom and Dynegy Inc. +10.11 - Employment Agreement, effective February 1, 2000, between John U. Clarke and Dynegy Inc. +10.12 - Employment Agreement, effective February 1, 2000, between Kenneth E. Randolph and Dynegy Inc. 10.13 - Employment Agreement, dated as of July 1, 1997, by and between Dan Ryser and NGC Corporation. 10.14 - Lease Agreement entered into on June 12, 1996 between Metropolitan Life Insurance Company and Metropolitan Tower Realty Company, Inc., as landlord, and NGC Corporation, as tenant. (6) 10.15 - First Amendment to Lease Agreement entered into on June 12, 1996 between Metropolitan Life Insurance Company and Metropolitan Tower Realty Company, Inc., as landlord, and NGC Corporation, as tenant. (6) 10.16 - Contribution and Assumption Agreement, dated as of August 31, 1996, among Chevron U.S.A. Inc., Chevron Pipe Line Company, Chevron Chemical Company and Midstream Combination Corp. (5) 10.17 - Scope of Business Agreement, dated May 22, 1996 between Chevron Corporation and NGC Corporation. (6) 10.18 - Master Alliance Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc., Chevron Chemical Company, Chevron Pipe Line Company, and other Chevron U.S.A. Inc. affiliates, NGC Corporation, Natural Gas Clearinghouse, Warren Petroleum Company, Limited Partnership, Electric Clearinghouse, Inc. and other NGC Corporation affiliates. (5) * 10.19 - Natural Gas Purchase and Sale Agreement, dated as of August 30, 1996, among Chevron U.S.A. Inc. and Natural Gas Clearinghouse. (5) * 10.20 - Master Natural Gas Processing Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership. (5) * 10.21 - Master Natural Gas Liquids Purchase Agreement, dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron U.S.A. Inc. (5) * 10.22 - Gas Supply and Service Agreement, dated as of September 1, 1996, among Chevron Products Company and Natural Gas Clearinghouse. (5)
52 55
EXHIBIT NUMBER DESCRIPTION 10.23 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc. and Chevron U.S.A. Production Company. (6) 10.24 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc. and Chevron Chemical Company. (6) 10.25 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc. and Chevron Products Company. (6) * 10.26 - Feedstock Sale and Refinery Product Purchase Agreements, dated as of September 1, 1996, among Chevron Products Company and Warren Petroleum Company, Limited Partnership.(5) * 10.27 - Refinery Product Sale Agreement (Hawaii), dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron Products Company. (5) * 10.28 - Feedstock Sale and Refinery Product Master Services Agreement, dated as of September 1, 1996, among Chevron Products Company and Warren Petroleum Company, Limited Partnership. (5) * 10.29 - CCC Product Sale and Purchase Agreement dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron Chemical Company. (5) * 10.30 - CCC/WPC Services Agreement, dated as of September 1, 1996, among Chevron Chemical Company and Warren Petroleum Company, Limited Partnership. (5) * 10.31 - Operating Agreement, dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron Pipe Line Company. (5) 10.32 - Galena Park Services Agreement, dated as of September 1, 1996, among Chevron Products Company and Midstream Combination Corp. (5) * 10.33 - Venice Complex Operating Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership. (6) * 10.34 - Time Charter, dated as of August 31, 1996, by and between Midstream Barge Company, L.L.C. and Warren Petroleum Company, Limited Partnership. (5) * 10.35 - Limited Liability Company Agreement of Midstream Barge Company, L.L.C., dated as of August 31, 1996, by and between Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership. (5) 10.36 - Subscription Agreement between Energy Convergence Holding Company and Chevron U.S.A. Inc (15) 10.37 - Stock Purchase Agreement between Energy Convergence Holding Company and British Gas Atlantic Holdings BV and related Guaranty by British Gas Overseas Holdings Limited (15) 10.38 - Voting Agreement between Illinova and BG Holdings, Inc. (15) 10.39 - Voting Agreement between Illinova and NOVA Gas Services (U.S.) Inc. (15) 10.40 - Voting Agreement between Illinova and Chevron U.S.A. Inc. (15) 10.41 - Shareholder Agreement of Energy Convergence Holding Company with Chevron U.S.A. Inc. (15)
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EXHIBIT NUMBER DESCRIPTION 10.42 - Registration Rights Agreement (NOVA Gas Services (U.S.) Inc. and British Gas Atlantic Holdings BV) (15) 10.43 - First Amended and Restated Limited Partnership Agreement of the West Texas LPG Pipeline Limited Partnership (17) 10.44 - Amended and Restated Operating Agreement of the West Texas LPG Pipeline Limited Partnership and Chevron Pipeline Company (17) 10.45 - Dynegy Inc. Severance Pay Plan. (16) 10.46 - Registration Rights Agreement (Chevron U.S.A. Inc) (15) 10.47 - First Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17) 10.48 - Amendment No. 1 to the First Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17) 10.49 - Second Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17) 10.50 - Third Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17) 10.51 - Fourth Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17) 10.52 - Dynegy Midstream Services, Limited Partnership Supplemental Severance Pay Plan (17) 10.53 - NGC Profit Sharing/401(k) Savings Plan. (16) 10.54 - First Amendment to NGC Profit Sharing/401(k) Savings Plan. (16) 10.55 - Second Amendment to NGC Profit Sharing/401(k) Savings Plan. (16) 10.56 - Third Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. (17) +10.57 - Fourth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. +10.58 - Fifth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. +10.59 - Sixth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. +10.60 - Seventh Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. + 12.1 - Computation of Ratio of Earnings to Fixed Charges. + 22.1 - Subsidiaries of the Registrant. + 23.1 - Consent of Arthur Andersen LLP. + 27.1 - Financial Data Schedule.
- ------------------- + Filed herewith 54 57 * Exhibit omits certain information which the Company has filed separately with the Commission pursuant to a confidential treatment request pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. (1) Incorporated by reference to exhibits to the Registration Statement of Trident NGL, Inc. on Form S-1, Registration No. 33-43871. (2) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1993 of Trident NGL Holding, Inc., Commission File No. 1-11156. (3) Incorporated by reference to exhibits to the Registration Statement of Trident NGL Holding, Inc. on Form S-4, Registration No. 33-88907. (4) Incorporated by reference to the Registration Statement of NGC Corporation on Form S-3, Registration No. 33-97368. (5) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1996, of NGC Corporation, Commission File No. 1-11156. (6) Incorporated by reference to exhibits to the Registration Statement of Midstream Combination Corp. on Form S-4, Registration No. 333-09419. (7) Incorporated by reference to exhibits to the Current Report on Form 8-K of NGC Corporation, dated May 22, 1996, Commission File No. 1-11156. (8) Incorporated by reference to exhibits to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1996, of NGC Corporation, Commission File No. 1-11156. (9) Incorporated by reference to exhibits to the Current Report on Form 8-K of NGC Corporation, Commission File No. 1-11156, dated June 27, 1997. (10) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1997, Commission File No. 1-11156. (11) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1997, Commission File No. 1-11156 (12) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1998, Commission File No. 1-11156. (13) Incorporated by reference to exhibits to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997, of NGC Corporation, Commission File No. 1-11156. (14) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period ended September 30, 1998, Commission File No. 1-11156. (15) Incorporated by reference to exhibits to the Current Report on Form 8-K of Dynegy Inc. dated June 14, 1999. (16) Incorporated by reference to exhibits to the Annual Report in Form 10-K of the Fiscal Year Ended December 31, 1998, of Dynegy Inc., Commission File No. 1-11156. (17) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1999, Commission File No. 1-11156. (18) Incorporated by reference to exhibits to Amendment No. 1 to the Registration Statement on Form S-4 of Energy Convergence Holding Company filed with the Securities and Exchange Commission on September 7, 1999. (19) Incorporated by reference to exhibits to Registration Statement on Form 8-A of Dynegy Inc. (b) Reports on Form 8-K of Dynegy Inc.. None. 55 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dynegy Inc. Date: February 24, 2000 By: /s/ C. L. Watson ------------------------------------------ C. L. Watson, Chairman of the Board, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: February 24, 2000 By: /s/ C. L. Watson ------------------------------------------ C. L. Watson, Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) Date: February 24, 2000 By: /s/ John U. Clarke ------------------------------------------ John U. Clarke, Executive Vice President, Chief Financial Officer (Principal Financial Officer) and Advisory Director Date: February 24, 2000 By: /s/ Bradley P. Farnsworth ------------------------------------------ Bradley P. Farnsworth, Senior Vice President and Controller (Principal Accounting Officer) Date: February 24, 2000 By: /s/ Stephen W. Bergstrom ------------------------------------------ Stephen W. Bergstrom, President and Chief Operating Officer of Dynegy Inc. and Director Date: February 24, 2000 By: /s/ Charles E. Bayless ------------------------------------------ Charles E. Bayless, Director Date: February 24, 2000 By: /s/ J. Joe Adorjan ------------------------------------------ J. Joe Adorjan, Director 56 59 Date: February 24, 2000 By: /s/ Joe J. Stewart ------------------------------------------ Joe J. Stewart, Director Date: February 24, 2000 By: /s/ Darald W. Callahan ------------------------------------------ Darald W. Callahan, Director Date: February 24, 2000 By: /s/ Patricia A. Woertz ------------------------------------------ Patricia A. Woertz, Director Date: February 24, 2000 By: /s/ R.H. Matzke ------------------------------------------ R.H. Matzke, Director Date: February 24, 2000 By: /s/ John D. Zeglis ------------------------------------------ John D. Zeglis, Director Date: February 24, 2000 By: /s/ Daniel L. Dienstbier ------------------------------------------ Daniel L. Dienstbier, Director Date: February 24, 2000 By: /s/ J. Otis Winters ------------------------------------------ J. Otis Winters, Director 57 60 DYNEGY INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Report of Independent Public Accountants........................................ F-2 Consolidated Balance Sheets as of December 31, 1999 and 1998.................... F-3 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997........................................... F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997........................................... F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997....................... F-6 Notes to Consolidated Financial Statements...................................... F-7 FINANCIAL STATEMENT SCHEDULE Condensed Financial Statements of the Registrant................................ F-36
F-1 61 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Dynegy Inc.: We have audited the accompanying consolidated balance sheets of Dynegy Inc. (an Illinois corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dynegy Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The information included in Schedule I is presented for the purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Houston, Texas February 28, 2000 F-2 62 DYNEGY INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
DECEMBER 31, DECEMBER 31, 1999 1998 -------------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 45,230 $ 28,367 Accounts receivable, net 1,992,450 1,563,558 Accounts receivable, affiliates 48,966 60,180 Inventories 271,884 149,901 Assets from risk-management activities 379,833 219,105 Prepayments and other assets 66,717 96,130 -------------- ------------ 2,805,080 2,117,241 -------------- ------------ PROPERTY, PLANT AND EQUIPMENT 2,575,100 2,446,878 Less: accumulated depreciation (557,219) (514,771) -------------- ------------ 2,017,881 1,932,107 -------------- ------------ OTHER ASSETS Investments in unconsolidated affiliates 627,335 502,613 Assets from risk-management activities 452,913 135,100 Other assets 621,962 577,176 -------------- ------------ $ 6,525,171 $ 5,264,237 ============== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,667,199 $ 1,370,902 Accounts payable, affiliates 161,500 113,827 Accrued liabilities and other 184,013 155,227 Liabilities from risk-management activities 334,080 251,213 Notes payable and current portion of long-term debt 191,731 135,154 -------------- ------------ 2,538,523 2,026,323 LONG-TERM DEBT 1,299,333 953,001 OTHER LIABILITIES Non-Recourse Debt 34,593 93,889 Liabilities from risk-management activities 321,252 40,747 Deferred income taxes 335,190 317,537 Other long-term liabilities 486,798 504,677 -------------- ------------ 5,015,689 3,936,174 -------------- ------------ COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST 200,000 200,000 COMMITMENTS AND CONTINGENCIES (NOTE 9) STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, 50,000,000 shares authorized; 8,000,000 shares designated as Series A Participating Preferred Stock, 7,815,363 shares issued and outstanding at December 31, 1999 and 1998, respectively 75,418 75,418 Common stock, $.01 par value, 400,000,000 shares authorized; 157,499,001 shares issued at December 31, 1999 and 153,298,220 shares issued at December 31, 1998 1,575 1,533 Additional paid-in capital 973,000 935,183 Retained earnings 277,074 133,340 Less: treasury stock, at cost: 1,200,700 shares at December 31, 1999 and 1,200,700 shares at December 31, 1998 (17,585) (17,411) -------------- ------------ 1,309,482 1,128,063 -------------- ------------ $ 6,525,171 $ 5,264,237 ============== ============
See Notes to Consolidated Financial Statements. F-3 63 DYNEGY INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Revenues $ 15,429,976 $ 14,257,997 $ 13,378,380 Cost of sales 14,886,101 13,829,310 12,993,086 ------------ ------------ ------------ Operating margin 543,875 428,687 385,294 Depreciation and amortization 129,458 113,202 104,391 Impairment, abandonment and other charges -- 9,644 275,000 General and administrative expenses 200,717 185,708 149,344 ------------ ------------ ------------ Operating income (loss) 213,700 120,133 (143,441) Equity in earnings of unconsolidated affiliates 79,854 91,038 58,959 Other income 73,287 46,821 28,113 Interest expense (78,164) (74,992) (63,455) Other expenses (45,519) (7,677) (20,230) Minority interest in income of a subsidiary (16,632) (16,632) (9,841) ------------ ------------ ------------ Income (loss) before income taxes 226,526 158,691 (149,895) Income tax provision (benefit) 74,677 50,338 (62,210) ------------ ------------ ------------ Net income (loss) from continuing operations before 151,849 108,353 (87,685) cumulative effect of accounting change Cumulative effect of change in accounting principle (net of income tax benefit of $7,913) -- -- (14,800) ------------ ------------ ------------ NET INCOME (LOSS) $ 151,849 $ 108,353 $ (102,485) ============ ============ ============ NET INCOME PER SHARE: Net income (loss) from continuing operations $ 151,849 $ 108,353 $ (87,685) Cumulative effect of change in accounting principle (net of income tax benefit of $7,913) -- -- (14,800) Less: preferred stock dividends (391) (391) (391) ------------ ------------ ------------ Net income (loss) applicable to common stockholders $ 151,458 $ 107,962 $ (102,876) ============ ============ ============ Basic earnings (loss) per share $ 0.98 $ 0.71 $ (0.68) ============ ============ ============ Diluted earnings per share $ 0.91 $ 0.66 $ n/a ============ ============ ============ Basic shares outstanding 154,198 151,619 150,653 ============ ============ ============ Diluted shares outstanding 166,975 164,605 167,009 ============ ============ ============
See Notes to Consolidated Financial Statements. F-4 64 DYNEGY INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 151,849 $ 108,353 $ (102,485) Items not affecting cash flows from operating activities: Depreciation, amortization, impairment and abandonment 108,325 102,577 378,916 Equity in earnings of affiliates, net of cash distributions (13,754) (6,477) (4,073) Risk management activities (115,138) (7,422) (8,757) Deferred income taxes 63,167 52,308 (86,424) Amortization of bond premium -- (2,572) (6,768) Other, including gains on sale of assets (33,972) (22,540) 1,249 Change in assets and liabilities resulting from operating activities: Accounts receivable (463,479) 51,046 (35,845) Inventories (106,201) (17,380) 86,077 Prepayments and other assets 53,761 (30,605) (20,686) Accounts payable 348,077 44,113 (22,601) Accrued liabilities 37,001 (27,699) 14,064 Other, net (20,797) 7,078 85,922 ------------ ------------ ------------ Net cash provided by operating activities 8,839 250,780 278,589 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (364,559) (298,738) (220,003) Investment in unconsolidated affiliates (83,963) (78,096) (27,708) Business acquisitions, net of cash acquired -- (2,644) (715,589) Proceeds from asset sales 80,594 45,044 452,565 Other, net 49,264 39,352 -- ------------ ------------ ------------ Net cash used in investing activities (318,664) (295,082) (510,735) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings 397,488 212,259 2,218,500 Repayments of long-term borrowings (43,849) (493,277) (2,198,275) Net cash flow from commercial paper and money market lines of credit (42,161) 350,758 -- Proceeds from sale of capital stock, options and warrants 21,855 3,863 5,147 Issuance of company obligated preferred securities of a subsidiary trust, net -- -- 198,043 Treasury stock acquisitions (174) (6,905) (10,506) Dividends and other distributions, net (8,115) (7,988) (7,925) Other, net 1,644 (9,088) -- ------------ ------------ ------------ Net cash provided by financing activities 326,688 49,622 204,984 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 16,863 5,320 (27,162) Cash and cash equivalents, beginning of year 28,367 23,047 50,209 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 45,230 $ 28,367 $ 23,047 ============ ============ ============
See Notes to Consolidated Financial Statements. F-5 65 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, 1996 7,815 $ 75,418 149,847 $ 1,498 $ 896,432 $ 143,385 -- $ -- Net loss -- -- -- -- -- (102,485) -- -- Options exercised -- -- 1,541 15 11,577 -- -- -- Dividends and other Distributions -- -- -- -- -- (7,925) -- -- 401(k) plan and profit sharing stock issuances -- -- 385 5 7,401 -- -- -- Options granted -- -- -- -- 4,044 -- -- -- Treasury stock acquisitions -- -- -- -- -- -- (655) (10,506) Other -- -- 24 -- 266 -- -- -- --------- --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 1997 7,815 75,418 151,797 1,518 919,720 32,975 (655) (10,506) Net income -- -- -- -- -- 108,353 -- -- Options exercised -- -- 1,032 10 3,808 -- -- -- Dividends and other Distributions -- -- -- -- -- (7,988) -- -- 401(k) plan and profit sharing stock issuances -- -- 457 5 6,822 -- -- -- Options granted -- -- -- -- 4,675 -- -- -- Treasury stock acquisitions -- -- -- -- -- -- (546) (6,905) Other -- -- 12 -- 158 -- -- -- --------- --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 1998 7,815 75,418 153,298 1,533 935,183 133,340 (1,201) (17,411) Net income -- -- -- -- -- 151,849 -- -- Options exercised -- -- 3,523 35 21,992 -- -- -- Dividends and other Distributions -- -- -- -- -- (8,115) -- -- 401(k) plan and profit sharing stock issuances -- -- 670 7 9,869 -- -- -- Options granted -- -- -- -- 6,028 -- -- -- Treasury stock acquisitions -- -- -- -- -- -- -- (174) Other -- -- 8 -- (72) -- -- -- --------- --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 1999 7,815 $ 75,418 157,499 $ 1,575 $ 973,000 $ 277,074 (1,201) $ (17,585) ========= ========= ========= ========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements. F-6 66 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- ACCOUNTING POLICIES Dynegy Inc. ("Dynegy" or the "Company") is a holding company that conducts substantially all of its business through its subsidiaries. The Company is a leading provider of energy products and services in North America, the UK and continental Europe. Products marketed by the Company's wholesale marketing operations include natural gas, electricity, coal, emissions, natural gas liquids, crude oil, liquid petroleum gas and related services. The Company's wholesale marketing operations are supported by ownership or control of an extensive asset base and transportation network that includes unregulated power generation, gas and liquids storage capacity, gas, power and liquids transportation capacity and gas gathering, processing and fractionation assets. The Company is a holding company that conducts substantially all of its business through its subsidiaries. From inception of operations in 1984 until 1990, Natural Gas Clearinghouse ("Clearinghouse") limited its activities primarily to natural gas marketing. Starting in 1990, Clearinghouse expanded its core business operations through acquisitions and strategic alliances resulting in the formation of a midstream energy asset business and establishing energy marketing operations in both Canada and the United Kingdom. The Company initiated electric power marketing operations in February 1994. Effective March 1, 1995, Clearinghouse and Trident NGL Holding, Inc. ("Holding"), a fully integrated natural gas liquids company, merged ("Trident Combination") and the combined entity was renamed NGC Corporation ("NGC"). On August 31, 1996, NGC completed a strategic combination with Chevron U.S.A. Inc. and certain Chevron affiliates (collectively "Chevron") whereby substantially all of Chevron's midstream assets merged with NGC ("Chevron Combination"). Effective July 1, 1997, NGC acquired Destec Energy, Inc. ("Destec Acquisition"), a leading independent power producer. During 1998, the Company changed its name to Dynegy Inc. On June 14, 1999, Dynegy and Illinova Corp. ("Illinova") announced the execution of definitive agreements for the merger of Illinova and Dynegy. The Illinova acquisition was closed on February 1, 2000 (see Note 17). Concurrent with the closing, Dynegy Inc. changed its name to Dynegy Holding, Inc. and Illinova was renamed Dynegy Inc. The accounting policies of Dynegy conform to generally accepted accounting principles. The more significant of such accounting policies are described below. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to develop estimates and make assumptions that affect reported financial position and results of operations and that impact the nature and extent of disclosure, if any, of contingent assets and liabilities. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after elimination of intercompany accounts and transactions. Investments in affiliates in which the Company has a significant ownership interest, generally 20 percent to 50 percent, are accounted for by the equity method. Other investments are carried at cost. Certain reclassifications have been made to prior-period amounts to conform with current-period financial statement classifications. CASH AND CASH EQUIVALENTS. Cash and cash equivalents consist of all demand deposits and funds invested in short-term investments with original maturities of three months or less. At December 31, 1999, approximately $7 million of cash and cash equivalents was restricted. CONCENTRATION OF CREDIT RISK. Dynegy provides multiple energy commodity solutions principally to customers in the electric and gas distribution industries and to entities engaged in industrial and petrochemical businesses. These industry concentrations have the potential to impact the Company's overall exposure to credit risk, either positively or negatively, in that the customer base may be similarly affected by changes in economic, industry or other conditions. Receivables are generally not collateralized; however, Dynegy believes the credit risk posed by industry concentration is offset by the diversification and creditworthiness of the Company's customer base. INVENTORIES. Inventories consisting primarily of natural gas in storage of $165.1 million and $78.2 million, natural gas liquids of $66.2 million and $23.4 million, and crude oil of $10.7 million and $25.2 million at December 31, 1999 and 1998, respectively, are valued at the lower of weighted average cost or at market. Materials and F-7 67 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS supplies inventory of $29.9 million and $23.1 million at December 31, 1999 and 1998, respectively, is carried at the lower of cost or market using the specific-identification method. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment consisting principally of gas gathering, processing, fractionation, terminalling and storage facilities, natural gas transmission lines, pipelines, power generating facilities and supporting infrastructure is recorded at cost. Expenditures for major replacements and renewals are capitalized while expenditures for maintenance, repairs and minor renewals to maintain facilities in operating condition are expensed. Depreciation is provided using the straight-line method over the estimated economic service lives of the assets, ranging from three to 30 years. Composite depreciation rates are applied to functional groups of property having similar economic characteristics. Gains and losses are not recognized for retirements of property, plant and equipment subject to composite depreciation rates ("composite rate") until the asset group subject to the composite rate is retired. The Company reviews the carrying value of its long-lived assets in accordance with provisions of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets." ENVIRONMENTAL COSTS AND OTHER CONTINGENCIES. Environmental costs relating to current operations are expensed or capitalized, as appropriate, depending on whether such costs provide future economic benefit. Liabilities are recorded when environmental assessment indicates that remedial efforts are probable and the costs can be reasonably estimated. Measurement of liabilities is based on currently enacted laws and regulations, existing technology and site-specific costs. Such liabilities may be recognized on a discounted basis if the amount and timing of anticipated expenditures for a site are fixed or reliably determinable; otherwise, such liabilities are recognized on an undiscounted basis. Environmental liabilities in connection with assets that are sold or closed are realized upon such sale or closure, to the extent they are probable, can be estimated and have not previously been reserved. In assessing environmental liabilities, no offset is made for potential insurance recoveries. Recognition of any joint and several liability is based upon the Company's best estimate of its final pro rata share of such liability. Liabilities for other contingencies are recognized upon identification of an exposure, which when fully analyzed indicates that it is both probable that an asset has been impaired or that a liability has been incurred and that such loss amount can be reasonably estimated. Costs to remedy such contingencies or other exposures are charged to a reserve, if one exists, or otherwise to current operations. GOODWILL AND OTHER INTANGIBLE ASSETS. Intangible assets, principally goodwill, are generally amortized by the straight-line method over an estimated useful life of up to 30 years. At December 31, 1999 and 1998, unamortized goodwill was classified as an other long-term asset aggregating $364.7 million and $392.3 million, respectively. REVENUE RECOGNITION. Revenues for product sales and gas processing and marketing services are recognized when title passes to the customer or when the service is performed. Fractionation and transportation revenues are recognized based on volumes received in accordance with contractual terms. Revenues derived from power generation are recognized upon output, product delivery or satisfaction of specific targets, all as specified by contractual terms. Fees derived from engineering and construction contracts and development and other activities received from joint ventures in which Dynegy holds an equity interest are deferred to the extent of Dynegy's ownership interest and amortized on a straight-line basis over appropriate periods, which vary according to the nature of the service provided and the ventures' operations. Substantially all of the operations of the Company's world-wide gas marketing, power marketing, and crude marketing operations are accounted for under a mark-to-market accounting methodology. Under mark-to-market accounting, fixed-price forwards, swaps, options, futures and other financial instruments with third parties are reflected at fair market value, net of reserves, with resulting unrealized gains and losses recorded as assets and liabilities from risk management activities in the consolidated balance sheets. The accrual method of accounting is used for accounting for NGL marketing activities. The Company routinely enters into financial instrument contracts to hedge purchase and sale commitments, fuel requirements and inventories in its natural gas liquids, crude oil, electricity and coal businesses in order to minimize the risk of market fluctuations. Dynegy also monitors its exposure to fluctuations in interest rates and F-8 68 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS foreign currency exchange rates and may execute swaps, forward-exchange contracts or other financial instruments to manage these exposures. Financial instruments that are utilized in the Company's trading operations are considered to be trading and accounted for accordingly. Gains and losses from hedging transactions are recognized in income and are reflected as cash flows from operating activities in the periods for which the underlying commodity, interest rate or foreign currency transaction was hedged. If the necessary correlation to the commodity, interest rate or foreign currency transaction being hedged ceases to exist, the Company ceases to account for the contract as a hedge and recognizes a gain or loss to the extent the contract results have not been offset by the effects of price or interest rate changes on the hedged item since inception of the hedge. If the underlying being hedged by the commodity, interest rate or foreign currency transaction is disposed of or otherwise terminated, the gain or loss associated with such contract(s) is no longer deferred and is recognized in the period the underlying is eliminated. INCOME TAXES. The Company files a consolidated United States federal income tax return and, for financial reporting purposes, provides income taxes for the difference in the tax and financial reporting bases of its assets and liabilities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." EARNINGS PER SHARE. Basic earnings per share represents the amount of earnings for the period available to each share of common stock outstanding during the period. Diluted earnings per share represents the amount of earnings for the period available to each share of common stock outstanding during the period plus each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period. Differences between basic and diluted shares outstanding in all periods are attributed to the Series A Preferred Stock, options outstanding and a warrant. FOREIGN CURRENCY TRANSLATIONS. For subsidiaries whose functional currency is other than U.S. dollar, assets and liabilities are translated at year-end rates of exchange and revenues and expenses are translated at average exchange rates prevailing during the year. For each of the three years in the period ended December 31, 1999, items of other comprehensive income were immaterial to the Company's operating results. NOTE 2 -- RISK MANAGEMENT AND FINANCIAL INSTRUMENTS Dynegy's operating results are impacted by commodity price, interest rate and foreign exchange rate fluctuations. The Company routinely enters into financial instrument contracts to hedge purchase and sale commitments, fuel requirements and inventories in its natural gas, natural gas liquids, crude oil, electricity and coal businesses in order to minimize the risk of market fluctuations. However, as a result of marketplace liquidity and other factors, the Company may, at times, be unable to hedge certain identified market risks. Further, the Company may, at times, have a bias in the market, within established guidelines, resulting from the management of its commodity portfolios. Dynegy also monitors its exposure to fluctuations in interest rates and foreign currency exchange rates and may execute swaps, forward-exchange contracts or other financial instruments to manage these exposures. The Energy Convergence segment includes the integrated component businesses: wholesale gas marketing, wholesale power marketing and power generation. Operating margins earned by wholesale gas and power marketing, exclusive of risk-management activities, are relatively insensitive to commodity price fluctuations since most of the purchase and sales contracts do not contain fixed-price provisions. Generally, prices contained in these contracts are tied to a current spot or index price and, therefore, adjust directionally with changes in overall market conditions. However, market price fluctuations for natural gas and electricity can have a significant impact on the operating margin derived from risk-management activities in these businesses. Dynegy generally attempts to balance its fixed-price physical and financial purchase and sales commitments in terms of contract volumes, and the timing of performance and delivery obligations. To the extent a net open position exists, fluctuating commodity market prices can impact Dynegy's financial position or results of operations, either favorably or unfavorably. The net open positions are actively managed, and the impact of changing prices on the Company's financial condition at a point in time is not necessarily indicative of the impact of price movements throughout the year. Historically, fuel costs, principally natural gas, represented the primary variable cost impacting the financial performance of the Company's F-9 69 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS investment in power generating facilities. Operating margins at these facilities were relatively insensitive to commodity price fluctuations since most purchase and sales contracts contained variable power sales contract features tied to a current spot or index natural gas price, allowing revenues to adjust directionally with changes in natural gas prices. However, the Company's investment strategy, which emphasizes growth of merchant generation capacity, is altering the makeup of its generation asset portfolio. The growth of merchant generation capacity as a percentage of total available capacity increases the Company's exposure to commodity price risk. The financial performance and cash flow derived from merchant generation capacity is impacted, either favorably or unfavorably, by changes in and the relationship between natural gas and electricity prices. Operating margins associated with the Midstream segment's natural gas gathering, processing and fractionation activities are very sensitive to changes in natural gas liquids prices, principally as a result of contractual terms under which natural gas is processed and products are sold by these businesses and the availability of inlet volumes. In addition, certain of the Midstream Businesses' processing plant assets are impacted by changes in, and the relationship between, natural gas and natural gas liquids prices which, in turn influences the volumes of gas processed. Commodity price fluctuations also impact the operating margins derived from the Midstream segment's natural gas liquids and crude oil marketing businesses. Dynegy's commercial groups manage, on a portfolio basis, the market risks inherent in their transactions, subject to parameters established by the Dynegy Board of Directors. Market risks are monitored by a risk control group that operates independently from the commercial units that create or actively manage these risk exposures to ensure compliance with Dynegy's risk management policies. Risk measurement is also practiced against the Dynegy portfolios with stress testing and scenario analysis. ACCOUNTING FOR RISK MANAGEMENT ACTIVITIES. Effective with the adoption of Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities" ("EITF 98-10") on January 1, 1999, substantially all of the operations of the Company's world-wide gas marketing, power marketing, and crude marketing operations are accounted for under a mark-to-market accounting methodology. Under mark-to-market accounting, fixed-price forwards, swaps, options, futures and other financial instruments with third parties are reflected at fair market value, net of reserves, with resulting unrealized gains and losses recorded as assets and liabilities from risk management activities in the consolidated balance sheets. These assets and liabilities are affected by the actual timing of settlements related to these contracts and current-period changes resulting primarily from newly originated transactions and the impact of price movements. These changes are recognized as revenues in the consolidated statements of operations in the period in which the change occurs. Market prices used to value outstanding financial instruments reflect management's consideration of, among other things, closing exchange and over-the-counter quotations, the time value of money and volatility factors underlying the commitments. In certain of these markets, long-term contract commitments may extend beyond the period in which market quotations for such contracts are available. The lack of long-term pricing liquidity requires the use of mathematical models to value these commitments under the accounting method employed. These mathematical models utilize historical market data to forecast future elongated pricing curves, which are used to value the commitments that reside outside of the liquid market quotations. Realized cash returns on these commitments may vary, either positively or negatively, from the results estimated through application of forecasted pricing curves generated through application of the mathematical model. Dynegy believes that its mathematical models utilize state-of-the-art technology, pertinent industry data and prudent discounting in order to forecast certain elongated pricing curves. These market prices are adjusted to reflect the potential impact of liquidating Dynegy's position in an orderly manner over a reasonable period of time under present market conditions. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES. Dynegy measures entity-wide market risk in its financial trading and risk-management portfolios using value at risk. The quantification of market risk using value at risk provides a consistent measure of risk across diverse energy markets and products with different risk factors in order to set the overall corporate risk tolerance, to determine risk targets, and to set position limits. The use of this methodology requires a number of key assumptions including the selection of a confidence level and the holding period to liquidation. Dynegy relies on value at risk to determine the maximum potential reduction in the trading portfolio value allowed within a given probability over a defined period. Because of limitations to value at risk, F-10 70 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dynegy uses other means to monitor market risk in the trading portfolios. In addition to value at risk, Dynegy performs regular stress and scenario analysis to measure extreme losses due to exceptional events. The value at risk and stress testing results are reviewed to determine the maximum allowable reduction in the total equity of the commodity portfolios. Additional measures are used to determine the treatment of risks outside the value at risk methodologies, such as market volatility, liquidity, event and correlation risk. CREDIT AND MARKET RESERVES. In connection with the market valuation of its energy commodity contracts, the Company maintains certain reserves for a number of risks associated with these future commitments. Among others, these include reserves for credit risks based on the financial condition of counterparties, reserves for product location ("basis") differentials and consideration of the time value of money for long-term contracts. Counterparties in its trading portfolio consist principally of financial institutions, major energy companies and local distribution companies. The creditworthiness of these counterparties may impact overall exposure to credit risk, either positively or negatively; however, with regard to its counterparties Dynegy maintains credit policies that management believes minimize overall credit risk. Determination of the credit quality of its counterparties is based upon a number of factors, including credit ratings, financial condition, project economics and collateral requirements. When applicable, the Company employs standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty. Based on these policies, its current exposures and its credit reserves, Dynegy does not anticipate a material adverse effect on its financial position or results of operations as a result of counterparty nonperformance. The following table displays the mark-to-market portfolio value of Dynegy's energy commodity risk management transactions at December 31, 1999:
BELOW INVESTMENT INVESTMENT GRADE CREDIT GRADE CREDIT QUALITY QUALITY TOTAL ------------ ------------ ------------ ($ IN THOUSANDS) Utilities and power generators ........................ $ 112,383 $ (2,033) $ 110,350 Financial institutions ................................ 37,173 -- 37,173 Oil and gas producers ................................. 21,594 5,142 26,736 Industrial companies .................................. 2,167 5,849 8,016 Other ................................................. 419 16 435 ------------ ------------ ------------ Value of fixed-price transactions before reserves ..... $ 173,736 $ 8,974 182,710 ============ ============ (38,177) Reserves .............................................. ------------ $ 144,533 Net fixed-price value ................................. ============
At December 31, 1999, the term of Dynegy's risk management portfolio extends to 2007 and the average remaining life of an individual transaction was 3 months. COMPREHENSIVE CHANGE IN ACCOUNTING PRINCIPLES. Effective January 1, 1999, the Company adopted the provisions of EITF 98-10 pursuant to the implementation requirements stated therein. The effect of adoption of the provisions of EITF 98-10 was to alter the Company's comprehensive method of accounting for energy-related contracts, as defined in that statement, resulting in changes to the accounting for certain commodity activity principally in the gas marketing operations in the United Kingdom and power and crude oil trading operations world-wide. The cumulative effect of this change in accounting principle was not material to the estimated annual 1999 results of operations. The pro forma effect on prior periods of the adoption of the provisions of EITF 98-10 was not determinable. The Company continues to analyze the effects of adoption of the rules promulgated by Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement No. 133"). Provisions in Statement No. 133 will affect the accounting and disclosure of contractual arrangements and operations of the Company. The Financial Accounting Standards Board recently deferred implementation of the provisions of F-11 71 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Statement No. 133 to fiscal periods beginning after June 15, 2000. Dynegy intends to adopt the provisions of Statement No. 133 within the timeframe and in accordance with the requirements provided by that statement. FAIR VALUE OF FINANCIAL INSTRUMENTS. The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." The estimated fair-value amounts have been determined by the Company using available market information and selected valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair-value amounts. The carrying values of current assets and liabilities approximate fair values due to the short-term maturities of these instruments. The carrying amounts and fair values of the Company's other financial instruments were:
December 31, ------------------------------------------------------------------- 1999 1998 ------------------------------- -------------------------------- Carrying Carrying Amount Fair Value Amount Fair Value -------------- -------------- -------------- -------------- ($ in thousands) Commercial Paper ................................. $ 456,482 $ 456,482 $ 518,643 $ 518,643 Money market lines of credit ..................... 40,000 40,000 20,000 20,000 Canadian Credit Agreement ........................ 40,000 40,000 40,000 40,000 6.75% Senior Notes, due 2005 ..................... 150,000 145,000 150,000 152,000 7.625% Senior Debentures, due 2026 ............... 175,000 163,000 175,000 179,000 7.125% Senior Debentures, due 2018 ............... 175,000 157,000 175,000 172,000 6.875% Senior Notes, due 2002 .................... 200,000 197,000 -- -- 7.45% Senior Notes, due 2006 ..................... 200,000 196,000 -- -- Non-Recourse Debt ................................ 89,175 89,175 103,126 103,126 Preferred Securities of a Subsidiary Trust ....... 200,000 191,000 200,000 204,000 Interest rate risk-management contracts .......... -- (2,761) -- (8,474) Foreign currency risk-management contracts ....... 2,685 2,545 4,418 5,491 Commodity risk-management contracts .............. 97,185 94,406 (29,222) (30,977)
The financial statement carrying amounts of the Company's credit agreement, variable-rate debt and power generation notes were assumed to approximate fair value. The fair values of the Company's other long-term indebtedness, including the Preferred Securities of a Subsidiary Trust , were based on quoted market prices by financial institutions that actively trade these debt securities. The fair value of the Company's cost basis investments was not estimated as the investments were considered immaterial. The fair value of interest rate, foreign currency and commodity risk-management contracts were based upon the estimated consideration that would be received to terminate those contracts in a gain position and the estimated cost that would be incurred to terminate those contracts in a loss position. The interest rate swap contracts, foreign currency forward exchange contracts and commodity swap and option agreements extend for periods of up to 11, 3 and 8 years, respectively. The absolute notional contract amounts associated with the commodity risk-management, interest rate and forward exchange contracts, respectively, were as follows: F-12 72 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, ------------------------------------------------ 1999 1998 1997 -------------- -------------- -------------- Natural Gas (Trillion Cubic Feet) 5.702 4.179 2.558 Electricity (Million Megawatt Hours) 42.949 1.835 2.244 Natural Gas Liquids (Million Barrels) 19.902 6.397 4.355 Crude Oil (Million Barrels) 35.554 18.800 14.920 Interest Rate Swaps (in thousands of US Dollars) $ 36,524 $ 69,332 $ 180,000 Fixed Interest Rate Paid on Swaps (Percent) 8.210 8.067 6.603 U.K. Pound Sterling (in thousands of US Dollars) $ 85,812 $ 69,254 $ 74,638 Average U.K. Pound Sterling Contract Rate (in US Dollars) $ 1.6191 $ 1.6143 $ 1.5948 Canadian Dollar (in thousands of US Dollars) $ 288,898 $ 268,307 $ 37,041 Average Canadian Dollar Contract Rate (in US Dollars) $ 0.6775 $ 0.6710 $ 0.7240
Cash-flow requirements for these commodity risk-management, interest rate and foreign exchange contracts were estimated based upon market prices in effect at December 31, 1999. Cash-flow requirements were as follows:
2000 2001 2002 2003 2004 BEYOND -------------- -------------- -------------- -------------- -------------- -------------- ($ IN THOUSANDS) Future estimated net inflows (outflows) based on year end market prices/rates $ 33,893 $ 13,735 $ 13,958 $ 13,711 $ 12,447 $ 6,446 ============== ============== ============== ============== ============== ==============
NOTE 3 -- CASH FLOW INFORMATION Detail of supplemental disclosures of cash flow and non-cash investing and financing information was:
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1999 1998 1997 -------------- -------------- -------------- ($ IN THOUSANDS) Interest paid (net of amount capitalized) $ 80,393 $ 83,376 $ 60,323 ============== ============== ============== Taxes paid (net of refunds) $ 1,927 $ (8,000) $ 8,043 ============== ============== ============== Detail of businesses acquired: Current assets and other $ -- $ 5,144 $ 547,505 Fair value of non-current assets -- 101,630 503,789 Liabilities assumed, including deferred taxes -- (104,130) (268,092) Capital stock issued and options exercised -- -- -- Cash balance acquired -- -- (67,613) -------------- -------------- -------------- Cash paid, net of cash acquired $ -- $ 2,644 $ 715,589 ============== ============== ==============
F-13 73 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT Investments in property, plant and equipment consisted of:
DECEMBER 31, ------------------------------ 1999 1998 ------------ ------------ ($ IN THOUSANDS) Energy Convergence Segment and Other $ 638,181 $ 407,945 Midstream Segment: Natural gas processing 1,210,713 1,241,658 Fractionation 176,961 185,198 Liquids marketing 141,397 139,328 Natural gas gathering and transmission 353,966 429,631 Crude oil 53,882 43,118 ------------ ------------ 2,575,100 2,446,878 Less: accumulated depreciation (557,219) (514,771) ------------ ------------ $ 2,017,881 $ 1,932,107 ============ ============
Interest capitalized related to costs of projects in process of development totaled $16.7 million, $7.6 million and $8.8 million for each of the three years in the period ended December 31, 1999. In the second quarter of 1998 and the fourth quarter of 1999, the Company purchased the outstanding partnership interests held by third parties in three separate limited partnerships, each formed for the purpose of owning and operating a discrete power generation facility in the State of California. As of the effective date of each transaction, the Company began consolidating the aggregate assets, liabilities and results of operations associated with these projects. In January 2000, these partnership interests were sold as a condition precedent to the Illinova acquisition. NOTE 5 -- UNCONSOLIDATED AFFILIATES The equity method of accounting is used for investments in certain partnerships and for investments in companies in which Dynegy has a voting interest between 20 percent and 50 percent. Such investments include: ACCORD ENERGY LIMITED ("ACCORD"). Accord was formed in 1994 to market energy resources in the United Kingdom and Europe. Prior to 1997, Dynegy owned a 49 percent limited partner interest in Accord. In January 1997, such interest was converted to a 25 percent participating preferred stock interest. NICOR ENERGY, L.L.C. ("NICOR"). NICOR is a retail energy alliance formed with NICOR Energy Management Services, a subsidiary of NICOR Inc., to provide energy services to industrial, commercial and residential customers in the Midwest. Dynegy owns a 50 percent interest in this Delaware limited liability company. At December 31, 1999, the unamortized excess of the Company's investment in this joint venture over its equity in the underlying net assets of the affiliate approximated $2 million. SOUTHSTAR ENERGY SERVICES L.L.C. ("SOUTHSTAR"). SouthStar is a retail energy alliance formed with AGL Resources Inc. and Piedmont Natural Gas Company. The company offers a combination of unregulated energy products and services to industrial, commercial and residential customers in the Southeast. Dynegy owns a 20 percent interest in this Delaware limited liability company. POWER GENERATION PARTNERSHIPS. Dynegy owns interests in fourteen joint ventures, each formed to build, own and operate cogeneration facilities. The Company's interests in these joint ventures range from eight to 50 percent. Each partnership interest is accounted for under the equity method. Construction of the cogeneration facilities owned by each of the joint ventures was project financed and the obligations of the joint ventures are non-recourse to the Company. At December 31, 1999, the unamortized excess of the Company's investment in these joint ventures over its equity in the F-14 74 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS underlying net assets of the affiliates approximated $155 million. This amount is being amortized on the straight-line method over the estimated economic service lives of the underlying assets. In January 2000, seven of these partnership interests were sold as a condition precedent to the Illinova acquisition. QUICKTRADE L.L.C. ("QUICKTRADE"). Quicktrade, a Delaware limited liability company, was formed to develop, implement and operate an electronic trading system. Dynegy owned a 65.5 percent interest in this LLC during 1998 and the LLC was consolidated in the accompanying financial statements during 1998. During 1996 and 1997, the Company owned varying interests in Quicktrade and accounted for its interest under the equity method for the majority of those years. Effective January 1, 1999, the Company sold its interest in Quicktrade. GULF COAST FRACTIONATORS ("GCF"). GCF is a Texas limited partnership that owns and operates a natural gas liquids fractionation facility located in Mont Belvieu, Texas. Dynegy owns a 38.75 percent limited partner interest in GCF. At December 31, 1999, the unamortized excess of the Company's investment in GCF over its equity in the underlying net assets of the affiliate approximated $15 million. This amount is being amortized on the straight-line method over the estimated economic service life of the GCF assets. WEST TEXAS LPG PIPELINE PARTNERSHIP ("WEST TEXAS PARTNERSHIP"). The West Texas Partnership, a Texas limited partnership, holds all of the assets comprising the West Texas Pipeline, an interstate natural gas liquids pipeline. Dynegy acquired a 49 percent interest in the West Texas Partnership as part of the Chevron Combination. Effective May 1, 1999, Dynegy's interest in the West Texas Partnership was reduced to 39.2 percent, upon admittance of Mid-America Pipeline Company ("MAPL"), a subsidiary of Williams into the partnership. At December 31, 1999, the unamortized excess of the Company's investment in the West Texas Partnership over its equity in the underlying net assets of the affiliate approximated $25 million. This amount is being amortized on the straight-line method over the estimated economic service life of the underlying assets. VENICE ENERGY SERVICES COMPANY, L.L.C. ("VESCO"). VESCO is a Delaware limited liability company that owns and operates a natural gas processing, extraction, fractionation and storage facility located in Plaquemines Parish, Louisiana. Dynegy is operator of the facility and originally acquired a 37 percent interest in Venice Gas Processing Company ("Venice") effective November 1, 1996. In 1997, Venice reorganized as a limited liability company and, in September 1997, the VESCO members agreed to expand ownership in VESCO to include an affiliate of Shell Midstream Enterprises, a subsidiary of Shell Oil Company ("Shell"), effective September 1, 1997, in exchange for Shell's commitment of certain offshore reserves to VESCO. The transaction reduced Dynegy's interest in VESCO from 37 percent to approximately 32 percent, as of the effective date. Koch Energy Services Company ("Koch") acquired an interest in VESCO during 1998 pursuant to its contribution of a cryogenic gas-processing unit to VESCO. The transaction reduced Dynegy's interest in VESCO to approximately 23 percent. Dynegy operates the facility and has commercial responsibility for product distribution and sales. At December 31, 1999, the unamortized excess of the Company's investment in this joint venture over its equity in the underlying net assets of the affiliate approximated $10 million. WASKOM GAS PROCESSING COMPANY ("WASKOM"). Waskom is a Texas general partnership that owns and operates a natural gas processing, extraction and fractionation facility located in Henderson County, Texas. Dynegy owns a 33.33 percent in Waskom. Dynegy operates the facility and has commercial responsibility for product distribution and sales. BARGE CO. Barge Co., a Delaware limited liability company, owns pressurized LPG barges used in transporting LPGs principally in the Gulf of Mexico. Dynegy owns a 25 percent interest in Barge Co. At December 31, 1999, the unamortized excess of the Company's investment in Barge Co. over its equity in the underlying net assets of the affiliate approximated $9 million. This amount is being amortized on the straight-line method over the estimated economic service lives of the underlying assets. Aggregate equity method investment at December 31, 1999, 1998 and 1997, was $618.6 million, $498.5 million and $466.4 million, respectively. Dividends received on these investments during each of the three years in F-15 75 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the period ended December 31, 1999, totaled $66.1 million, $85 million and $54.9 million, respectively. Summarized aggregate financial information for these investments and Dynegy's equity share thereof was:
DECEMBER 31, -------------------------------------------------------------------------------------- 1999 1998 1997 -------------------------- -------------------------- -------------------------- TOTAL EQUITY SHARE TOTAL EQUITY SHARE TOTAL EQUITY SHARE ---------- ------------ ---------- ------------ ---------- ------------ ($ IN THOUSANDS) Current assets (1)(2) $ 317,731 $ 110,094 $ 324,462 $ 131,169 $ 283,787 $ 112,895 Non-current assets (1)(2) 1,973,318 786,636 1,983,731 803,333 1,830,106 736,667 Current liabilities (1)(2) 296,009 98,179 292,481 124,016 202,754 86,476 Non-current liabilities (1)(2) 1,050,740 420,842 1,160,639 485,673 1,249,874 521,691 Operating margin (1)(2)(3) 366,675 135,352 397,391 159,288 209,877 86,154 Net income (1)(2)(3) 134,836 55,376 157,054 68,706 83,601 33,799
1. The financial data for all periods presented is exclusive of amounts attributable to the Company's investment in Accord as disclosure data was unavailable for these periods. Dynegy's share of Accord earnings for each of the three years in the period ended December 31, 1999, totaled $21.0 million, $21.8 million and $25.9 million, respectively. 2. The financial data for all periods presented is exclusive of amounts attributable to the Company's investment in NCL (see Note 11) as such information was not comparable period-to-period, as a result of the NCL restructuring. Dynegy sold its interest in NCL effective April 1, 1997. Dynegy's share of NCL's loss for the three months ended March 31, 1997, totaled $892,000. 3. Equity earnings derived from investments acquired in the Destec acquisition accrue to Dynegy commencing July 1, 1997. The cost method of accounting is generally used to account for investment in partnerships or companies in which Dynegy has a voting interest of less than 20 percent. At December 31, 1999, the Company had five cost basis investments: Indeck North American Power Fund, L.P., Indeck North American Power Partners, L.P. (collectively "Indeck"), Altra Energy Technologies, Inc., Canadian Midstream Services, Ltd. and Compton Petroleum Corporation. Indeck is engaged in the acquisition and operation of electric power generating facilities. Altra provides business-to-business e-commerce products and services to the energy market. Canadian Midstream is a private company that acquires businesses engaged in gas processing and associated gas gathering systems. Compton Petroleum is located in Canada and is an independent exploration and production company. Dynegy's aggregate investment in these entities totaled $8.7 million and $4.1 million at December 31, 1999 and 1998, respectively, and Dynegy received an aggregate $0.4 million, $0.5 million and $0.5 million of dividends from Indeck during each of the three years in the period ended December 31, 1999. The Indeck investments totalling $4.2 million were sold in February 2000. NOTE 6 -- DEBT Debt consisted of:
DECEMBER 31, ----------------------------- 1999 1998 ------------ ------------ ($ IN THOUSANDS) Commercial Paper $ 456,482 $ 518,643 Money market lines of credit 40,000 20,000 Canadian Credit Agreement 40,000 40,000 6.75% Senior Notes, due 2005 150,000 150,000 7.625% Senior Debentures, due 2026 175,000 175,000 7.125% Senior Debentures, due 2018 175,000 175,000 6.875% Senior Notes, due 2002 200,000 -- 7.45% Senior Notes, due 2006 200,000 -- Non-Recourse Debt 89,175 103,126 Other, non-interest bearing -- 275 ------------ ------------ 1,525,657 1,182,044 Less: long-term debt due within one year 191,731 135,154 ------------ ------------ $ 1,333,926 $ 1,046,890 ============ ============
F-16 76 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMERCIAL PAPER AND MONEY MARKET LINES OF CREDIT. The Company utilizes commercial paper proceeds and borrowings under uncommitted money market lines of credit for general corporate purposes, including short-term working capital requirements. The commercial paper program is for amounts up to $800 million, as supported by existing credit agreements. Weighted average interest rates on amounts outstanding under the commercial paper program were 6.2 percent, and 6.1 percent at December 31, 1999 and 1998, respectively. Amounts outstanding under the uncommitted money market lines of credit bore interest at an average rate of 6.1 percent at December 31, 1999. The Company classifies outstanding commercial paper and borrowings under money market lines of credit as long-term debt to the extent of availability under existing committed credit facilities, as management's intent is to maintain these obligations for longer than one year, subject to an overall reduction in corporate debt levels. CREDIT AGREEMENTS. In May 1998, Dynegy refinanced its then existing revolving credit agreement with a $400 million, five-year revolving credit agreement that matures May 27, 2003, and a $400 million, 364-day revolving credit agreement originally maturing in May 1999 and renewed through May 2000 (the "Credit Agreements"). The Credit Agreements provide funding for letters of credit, working capital, capital expenditures and general corporate purposes, including commercial paper support. The Credit Agreements also require payment of various costs and fees, including an annual fee of 0.10 percent of the committed amount under the Credit Agreements. Generally, borrowings under the Credit Agreements bear interest at a Eurodollar rate plus a margin that is determined based on the Company's unsecured senior debt rating. At December 31, 1999, such margin was 0.30 percent. Financial covenants in the Credit Agreements are limited to a debt to capitalization test. Letters of credit under the Credit Agreements aggregated approximately $36.1 million at December 31, 1999. After consideration of the outstanding commercial paper, the unused borrowing capacity under the Credit Agreements approximated $267.4 million at December 31, 1999. CANADIAN CREDIT AGREEMENT. In November 1998, an indirect wholly owned Canadian subsidiary of the Company entered into a $60 million, two-year revolving credit facility, which matures on November 24, 2000 (the "Canadian Credit Agreement"). This agreement provides funding for general corporate purposes. The Canadian Credit Agreement requires payment of various costs and fees, including an annual fee of 0.25 percent of the committed amount under the agreement. Generally, borrowings under this agreement bear interest at a Eurodollar rate plus a margin that is determined based on the Company's unsecured senior debt rating. At December 31, 1999, such margin was 0.40 percent. The Canadian subsidiary's obligations under the Canadian Credit Agreement are fully and unconditionally guaranteed by the Company. At December 31, 1999, outstanding amounts under the facility totaled $40.0 million, at an average interest rate of 6.66 percent. 6.875% SENIOR NOTES DUE 2002. In July 1999, Dynegy sold $200 million of 6.875 percent Senior Notes due July 15, 2002. These notes were issued at a price of 99.890 percent, which after deducting underwriting discounts and commissions, resulted in net proceeds to the Company of approximately $199 million. The net proceeds from the sale were used to repay a portion of the outstanding indebtedness under the commercial paper program. Interest on these notes is payable semiannually on January 15 and July 15 of each year. The notes are redeemable only at maturity. At issuance, the notes were priced based on the then existing yield for 3-year U.S. Treasury Notes plus a spread based principally on the Company's credit rating. 6.75% SENIOR NOTES DUE 2005. In December 1995, Dynegy sold $150 million of 6.75 percent Senior Notes due December 15, 2005. These notes were issued at a price of 99.984 percent, which, after deducting underwriting discounts and commissions, resulted in net proceeds to the Company of approximately $149 million. Proceeds from the sale were used to repay a portion of the outstanding indebtedness under the then existing revolving credit agreement. Interest on the notes is payable semiannually on June 15 and December 15 of each year. At issuance, the notes were priced based on the then existing yield for 10-year U.S. Treasury Notes ("10-Year Base Treasury Rate") plus a spread based principally on the Company's credit rating. Prior to issuing these notes, the Company entered into two separate transactions with two separate financial institutions, the effect of which was to lock in the 10-Year Base Treasury Rate at approximately 6.2 percent on the full $150 million face value of this issuance. F-17 77 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7.45% SENIOR NOTES DUE 2006. In July 1999, Dynegy sold $200 million of 7.45 percent Senior Notes due July 15, 2006. These notes were issued at a price of 99.929 percent, which after deducting underwriting discounts and commissions, resulted in net proceeds to the Company of approximately $198.6 million. The net proceeds from the sale were used to repay a portion of outstanding indebtedness under the commercial paper program. Interest on the notes is payable semiannually on January 15 and July 15 of each year. These notes are redeemable, at the option of the Company, in whole or in part from time to time, at a formula based redemption price as defined in the associated indenture. At issuance, these notes were priced based on a benchmark Treasury of similar terms plus a spread principally based on the Company's credit rating. 7.625% SENIOR DEBENTURES DUE 2026. In October 1996, Dynegy sold $175 million of 7.625 percent Senior Debentures due October 15, 2026. These debentures were issued at a price of 99.522 percent, which, after deducting underwriting discounts and commissions, resulted in net proceeds to the Company of approximately $173 million. The net proceeds were used to repay a portion of the outstanding indebtedness under the then existing revolving credit agreement. Interest on the debentures is payable semiannually on April 15 and October 15 of each year. These debentures are redeemable, at the option of the Company, in whole or in part from time to time, at a formula based redemption price as defined in the associated indenture. At issuance, the debentures were priced based on the then existing yield for 30-year U.S. Treasury Notes ("30-Year Base Treasury Rate") plus a spread based principally on the Company's credit rating. Prior to issuing the debentures, the Company entered into a transaction, the effect of which was to lock in the 30-Year Base Treasury Rate at approximately 7.0 percent on $150 million of the $175 million face value of this issuance. 7.125% SENIOR DEBENTURES DUE 2018. In May 1998, Dynegy sold $175 million of 7.125 percent Senior Debentures due May 15, 2018. These debentures were issued at a price of 99.654 percent, which, after deducting underwriting discounts and commissions, resulted in net proceeds of approximately $173 million. Proceeds from the sale were used to retire short-term debt incurred in connection with the redemption of certain high-cost debt acquired in an acquisition. Interest on the debentures is payable semiannually on May 15 and November 15 of each year. These debentures are redeemable, at the option of the Company, in whole or in part from time to time, at a formula based redemption price as defined in the associated indenture. At issuance, the debentures were priced based on the then existing 30-Year Base Treasury Rate plus a spread based principally on the Company's credit rating. Prior to issuing these debentures, the Company entered into a series of transactions, the effect of which was to lock in the 30-Year Base Treasury Rate at approximately 6.0 percent on $148 million of the $175 million face value of this issuance. NON-RECOURSE DEBT. Included in the December 31, 1999 consolidated long-term debt balance was $89.2 million representing the aggregate principal balance outstanding under three separate notes. These notes are project specific debt with recourse only to three identified power generation projects. Each of the three notes represents a fifteen-year term loan obligation payable in semi-annual installments of principal plus accrued interest. Each note bears interest at a base rate plus a margin, as defined in each agreement. Interest rate swaps effectively fix the base rate on $63.3 million of the indebtedness at a weighted average rate of 8.085 percent. These notes are related to the Qualifying Facilities that were sold in February 2000. Aggregate maturities of all long-term indebtedness are: 2000 - $191.7 million; 2001 - $2.6 million; 2002 - $202.6 million; 2003 - $402.1 million; 2004 - - $3.0 million; 2005 and beyond - $723.7 million. F-18 78 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 -- INCOME TAXES The Company is subject to U.S. federal, foreign and state income taxes on its operations. Components of income tax expense (benefit) were:
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ ($ IN THOUSANDS) Current tax expense (benefit): Domestic $ -- $ (608) $ 13,230 Foreign 11,510 (1,362) 3,071 Deferred tax expense (benefit): Domestic 56,558 44,565 (81,306) Foreign 6,609 7,743 2,795 ------------ ------------ ------------ Income tax provision (benefit) $ 74,677 $ 50,338 $ (62,210) ============ ============ ============
Components of income (loss) before income taxes were as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ ($ IN THOUSANDS) Income (loss) before income taxes: Domestic $ 165,606 $ 133,867 $ (180,127) Foreign 60,920 24,824 30,232 ------------ ------------ ------------ $ 226,526 $ 158,691 $ (149,895) ============ ============ ============
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, ----------------------------- 1999 1998 ------------ ------------ ($ IN THOUSANDS) Deferred tax assets: Loss carryforward $ 149,321 $ 132,445 Tax credits 11,893 10,798 ------------ ------------ 161,214 143,243 Valuation allowance -- -- ------------ ------------ 161,214 143,243 ------------ ------------ Deferred tax liabilities: Items associated with capitalized costs 496,404 460,780 ------------ ------------ Net deferred tax liability $ 335,190 $ 317,537 ============ ============
Realization of the aggregate deferred tax asset is dependent on the Company's ability to generate taxable earnings in the future. There was no valuation allowance established at December 31, 1999 or 1998, as management believes the aggregate deferred asset is more likely than not to be fully realized in the future. Income tax provision (benefit) for the years ended December 31, 1999, 1998 and 1997, was equivalent to effective rates of 33 percent, 32 percent and (41) percent, respectively. Differences between taxes computed at the U.S. federal statutory rate and the Company's reported income tax provision (benefit) were: F-19 79 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ ($ IN THOUSANDS) Expected tax at U.S. statutory rate $ 79,284 $ 55,444 $ (52,463) State taxes 3,285 2,564 (3,676) Foreign tax benefit (3,203) (2,300) (5,415) Basis differentials and other (4,689) (5,370) (656) ------------ ------------ ------------ Income tax provision (benefit) $ 74,677 $ 50,338 $ (62,210) ============ ============ ============
At December 31, 1999, the Company had approximately $404 million of regular tax net operating loss carryforwards. The net operating loss carryforwards expire from 2006 through 2019. Certain provisions of the Internal Revenue Code place an annual limitation on the Company's ability to utilize tax carryforwards existing as of the date of a 1995 business acquisition. Management believes such carryforwards will be fully realized prior to expiration. NOTE 8 -- COMPANY OBLIGATED PREFERRED SECURITIES OF A SUBSIDIARY TRUST In May 1997, NGC Corporation Capital Trust I ("Trust") issued, in a private transaction, $200 million aggregate liquidation amount of 8.316% Subordinated Capital Income Securities ("Trust Securities") representing preferred undivided beneficial interests in the assets of the Trust. The Trust invested the proceeds from the issuance of the Trust Securities in an equivalent amount of 8.316% Subordinated Debentures ("Subordinated Debentures") of the Company. The sole assets of the Trust are the Subordinated Debentures. The Trust Securities are subject to mandatory redemption in whole but not in part on June 1, 2027, upon payment of the Subordinated Debentures at maturity, or in whole but not in part at any time, contemporaneously with the optional prepayment of the Subordinated Debentures, as allowed by the associated indenture. The Subordinated Debentures are redeemable, at the option of the Company, in whole at any time or in part from time to time, at formula-based redemption prices, as defined in the indenture. The Subordinated Debentures represent unsecured obligations of the Company and rank subordinate and junior in right of payment to all Senior Indebtedness to the extent and in the manner set forth in the associated indenture. The Company has irrevocably and unconditionally guaranteed, on a subordinated basis, payment for the benefit of the holders of the Trust Securities the obligations of the Trust to the extent the Trust has funds legally available for distribution to the holders of the Trust Securities, as described in the indenture ("Guarantee"). Distributions on the Trust Securities are payable each June 1 and December 1, coinciding with the interest payment due dates on the Subordinated Debentures, and are classified in the accompanying Statement of Operations as "minority interest in income of a subsidiary." The periodic distributions accruing at an annual rate of 8.316 percent of the aggregate liquidation amount are recorded as minority interest in income of a subsidiary in the Company's consolidated statement of operations. So long as no Debenture Event of Default, as defined, has occurred and continues, the Company has the right to defer the payment of interest on the Subordinated Debentures for any Extension Period elected by the Company, which period cannot extend beyond 10 consecutive semi-annual periods, end on a date other than an Interest Payment Date or extend beyond the Stated Maturity Date. The Trust has executed an exchange offer through which all of the outstanding Trust Securities were exchanged by the holders thereof for registered securities having substantially the same rights and obligations. NOTE 9 -- COMMITMENTS AND CONTINGENCIES LITIGATION. Through its acquisition of Destec Energy Inc., Dynegy became a party to certain litigation with Pacific Gas and Electric Company ("PG&E") and with the Southern California Gas Company ("SOCAL"). These cases represent pre-acquisition contingencies acquired by the Company and settlement thereof did not have a material adverse effect on the Company's results of operations or financial position. The following describes resolution of these two cases. F-20 80 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In April 1997, PG&E had filed a lawsuit in the Superior Court of the State of California, City and County of San Francisco, against Destec Energy, Inc., Destec Holdings, Inc. and Destec Operating Company (wholly-owned subsidiaries of the Company now known respectively as Dynegy Power Corp., Dynegy Power Holdings, Inc. and Dynegy Operating Company) as well as against San Joaquin CoGen Limited ("San Joaquin") and its general partners (collectively the "Dynegy Defendants"). In the lawsuit, PG&E asserted claims and alleged unspecified damages for fraud, negligent misrepresentation, unfair business practices, breach of contract and breach of the implied covenant of good faith and fair dealing. Subsequent to the acquisition of Destec Energy Inc. by Dynegy, Dynegy and PG&E engaged in settlement discussions, which resulted in the execution of a Termination and Settlement Agreement between PG&E and the Dynegy Defendants on March 9, 1999 (the "PG&E Settlement Agreement"). The PG&E Settlement Agreement provided for, upon the receipt of CPUC approval, a dismissal with prejudice of PG&E's claims against the Dynegy Defendants, a release by PG&E of all claims relative to FERC matters and a termination of the San Joaquin power purchase agreement as of December 31, 1999, whereupon the San Joaquin facility would continue to operate as a merchant plant. Upon termination of the power purchase agreement, Dynegy would repay project debt of approximately $26 million. By Order dated October 7, 1999, the CPUC approved the PG&E Settlement Agreement. The CPUC approval became final on November 8, 1999. Pursuant to its lawsuit against Dynegy, PG&E had named Libbey-Owens- Ford ("LOF"), San Joaquin's steam host, as an additional defendant in the action in October 1997. It is alleged that San Joaquin was liable to PG&E under the Gas Transportation Agreement or Power Purchase Agreement due to LOF's failure to use sufficient quantities of steam as required to retain its status as a qualifying facility under federal standards. The Dynegy Defendants will seek to recover from LOF losses resulting from the settlement with PG&E. In March 1995, SOCAL had filed a lawsuit in the Superior Court of the State of California for the County of Los Angeles, against Destec Energy, Inc., Destec Holdings and Destec Gas Services, Inc. (now known respectively as Dynegy Power Corp., Dynegy Holdings, Inc. and Dynegy Gas Services, Inc.), wholly-owned direct and indirect subsidiaries of the Company (collectively, the "Defendants"), as well as against Chalk Cliff Limited and McKittrick Limited (collectively, the "Partnerships"). All general partners of the Partnerships are also named defendants. The lawsuit alleged breach of contract against the Partnerships and their respective general partners, and interference and conspiracy to interfere with contracts against the Defendants. The breach of contract claims arose out of the "transport-or-pay" provisions of the gas transportation service agreements between the Partnerships and SOCAL. SOCAL sought damages from the Partnerships for past damages and anticipatory breach damages in an amount equal to approximately $31,000,000. Subsequent to the acquisition of Destec Energy Inc.by Dynegy, Dynegy and SOCAL engaged in settlement discussions, which resulted in the execution of a Settlement Agreement between SOCAL and all defendants in the pending litigation on August 25, 1999, (the "SOCAL Settlement Agreement"). The SOCAL Settlement Agreement was approved by the CPUC and is final. The Settlement Agreement provided for the dismissal of the pending litigation, the termination of underlying gas transmission service contracts, and Dynegy's payment of settlement consideration approximating $31 million. The pending appeals were dismissed and the litigation and the associated foreclosure proceedings have therefore come to an end. On August 3, 1998, Modesto Irrigation District ("MID") filed a lawsuit against PG&E and Destec in federal court for the Northern District of California, San Francisco division. The lawsuit alleges violation of federal and state antitrust laws and breach of contract against Destec. The allegations are related to a power sale and purchase arrangement in the city of Pittsburg, CA. MID seeks actual damages from PG&E and Destec in amounts not less than $25 million. MID also seeks a trebling of any portion of damages related to its antitrust claims. By order dated February 2, 1999, the federal District Court dismissed MID's state and federal antitrust claims against PG&E and Destec; however, the Court granted MID leave of thirty days to amend its complaint to state an antitrust cause of action. On March 3, 1999, MID filed an amended complaint recasting its federal and state antitrust claims against PG&E and Destec and restating its breach of contract claim against Destec. PG&E and Destec have filed motions to dismiss MID's revised federal and state antitrust claims. The hearing on the motions to dismiss was held in July 1999. On August 20, 1999, the District Court again dismissed MID's antitrust claims against PG&E and Destec, this time without leave to amend the complaint. As a result of the dismissal of the antitrust claims, the District Court also dismissed the pendant state law claims. MID has appealed the District Court's dismissal of its suit to the Ninth Circuit Court of Appeal. F-21 81 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Following dismissal of its federal court suit, MID filed suit in California state court asserting its breach of contract claims against Destec and its tortious interference with contract claims against PG&E. Motions to dismiss MID's state court claims are pending and scheduled for hearing in first quarter 2000. Dynegy believes the allegations made by MID are meritless and will continue to vigorously defend MID's claims. In the opinion of management, the amount of ultimate liability with respect to these actions will not have a material adverse effect on the financial position or results of operations of the Company. On July 30, 1999, The Dow Chemical Company ("Dow") filed a lawsuit in the United States District Court for the District of Delaware against Dynegy Power Corporation ("DPC"), a wholly-owned subsidiary of the Company. Dow sought contribution from DPC in connection with claims against Dow asserted by The AES Corporation ("AES") in a lawsuit filed on November 30, 1998 in the United States District Court for the Southern District of Texas. AES asserts various federal and Texas securities laws claims, and Texas claims for fraud and civil conspiracy, arising out of AES' September 1997 purchase of stock of Destec Engineering, a subsidiary of DPC (at that time Destec Power Corp). Specifically, AES alleges that Destec Power made certain misrepresentations about the expected profits that Destec Engineering would earn in connection with the construction of the Elsta power plant in The Netherlands, and the anticipated completion date of the Elsta plant. AES alleges that Dow is liable because it "controlled" or had the power to control the management of Destec Power. AES's original complaint did not assert any claims against Destec Power or any other Dynegy entity. Dow is vigorously defending against AES' claims. In response to a motion to transfer filed by Dow, the United States District Court for the Southern District of Texas transferred the suit to the United States District Court for Delaware. Following transfer of the litigation, AES added DPC as a defendant, asserting claims similar to the claims asserted against Dow. Dow subsequently dismissed the suit against DPC without prejudice. AES and DPC have reached a settlement of AES's claims against DPC. The settlement is currently before the District Court for approval. If approved by the District Court, the settlement will result in the dismissal of AES's suit against DPC with prejudice. In the opinion of management, the ultimate resolution of this lawsuit will not have a material adverse effect on the Company's financial position. COMPLAINT AGAINST ILLINOIS POWER COMPANY. On November 3, 1999, the U.S. Environmental Protection Agency ("EPA") issued a Notice of Violation ("NOV") against Illinois Power Company ("Illinois Power") and, with the Department of Justice ("DOJ"), filed a Complaint against Illinois Power in the U.S. District Court for the Southern District of Illinois, No. 99C833. Similar notices and lawsuits have been filed against a number of other utilities. Both the NOV and Complaint allege violations of the Clean Air Act and regulations thereunder. More specifically, both allege, based on the same events, that certain equipment repairs, replacements and maintenance activities at Illinois Power's three Baldwin Station generating units constituted "major modifications" under either or both the Prevention of Significant Deterioration and the New Source Performance Standards regulations. When non-exempt "major modifications" occur, the Clean Air Act and related regulations generally require that generating facilities meet more stringent emissions standards. The DOJ amended its complaint to assert the claims found in the NOV. Illinois Power is filing responsive pleadings in the first quarter 2000. The regulations under the Clean Air Act provide certain exemptions to the definition of "major modifications," particularly an exemption for routine repair, replacement or maintenance. The Company has analyzed each of the activities covered by the EPA's allegations and believes each activity represents prudent practice regularly performed throughout the utility industry as necessary to maintain the operational efficiency and safety of equipment. As such, the Company believes that each of these activities is covered by the exemption for routine repair, replacement and maintenance and that the EPA is changing, or attempting to change through enforcement actions, the intent and meaning of its regulations. The Company also believes that, even if some of the activities in question were found not to qualify for the routine exemption, there were no increases either in annual emissions or in the maximum hourly emissions achievable at any of the units caused by any of the activities. The regulations provide an exemption for increased hours of operation or production rate and for increases in emissions resulting from demand growth. F-22 82 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Although none of Illinois Power's other facilities are covered in the Complaint and NOV, the EPA has officially requested information concerning activities at Illinois Power's Vermilion, Wood River and Hennepin Plants. It is possible that the EPA will eventually commence enforcement actions against those plants as well. The EPA has the authority to seek penalties for the alleged violations in question at the rate of up to $27,500 per day for each violation. The EPA also will be seeking installation of "best available control technology" ("BACT") (or equivalent) at the Baldwin Station and possibly at the other three plants as well. The Company believes that the EPA's and DOJ's claims are without merit, and that the ultimate resolution of this lawsuit will not have a material adverse effect on the Company's financial position or results of operations. The Company assumed liability for various claims and litigation in connection with the Illinova acquisition, Chevron Combination, the Trident Combination, the Destec acquisition and in connection with the acquisition of certain gas processing and gathering facilities from Mesa Operating Limited Partnership. The Company believes, based on its review of these matters and consultation with outside legal counsel, that the ultimate resolution of such items will not have a material adverse effect on the Company's financial position or results of operations. Further, the Company is subject to various legal proceedings and claims, which arise in the normal course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not have a material adverse effect on the financial position or results of operations of the Company. COMMITMENTS. In conducting its operations, the Company routinely enters into long-term commodity purchase and sale commitments, as well as agreements that commit future cash flow to the lease or acquisition of assets used in its businesses. These commitments are typically associated with capital projects, reservation charges associated with firm transmission, transportation and storage capacity, lease agreements for ship charters and other distribution assets and leases for office space, equipment and other similar items. The following describes the more significant commitments outstanding at December 31, 1999. The Company is engaged in a continuous capital asset expansion program consistent with its business plan and energy convergence strategies. The emphasis of this capital asset program is on the acquisition or construction of strategically located power generation assets. Consistent with this strategy and as a result of the long lead time required by industry manufacturers, a subsidiary of the Company has executed or is currently negotiating purchase orders to acquire in excess of forty state-of-the-art gas-fired turbines, representing a capital commitment of approximately $1.3 billion. Delivery of the manufactured turbines will occur ratably through 2003. Commitments under these purchase orders are generally payable consistent with the delivery schedule. The purchase orders include milestone requirements by the manufacturer and provide Dynegy with the ability to cancel each discrete purchase order commitment in exchange for a fee, which escalates over time. The capital asset program is subject to periodic review and revision, and the actual number of projects and aggregate cost for such projects will be dependent on various factors including available capital resources, market conditions, legislative actions, load growth, changes in materials, supplies and labor costs and the identification of partners in order to spread investment risk. The Company routinely enters into supply and market contracts for the purchase and sale of electricity, some of which contain fixed capacity payments. Obligations under these supply contracts, which are not already fair valued on the balance sheet at December 31, 1999, totaled $212 million on a discounted basis. Such obligations are generally payable on a ratable basis, the term of which extends through 2011. In return for such fixed capacity payments, Dynegy receives volumes of electricity at agreed prices, which it then may re-market. Based on year-end estimates, the market value of electricity available for sale under these contracts exceeds the cost of such electricity, which amount includes the fixed capacity payments disclosed herein. In October 1999, the Company announced that it had achieved all of the necessary approvals to begin construction on its Heard County Power Project, a 500-megawatt natural gas-fired, simple-cycle peaking facility located in Franklin in Heard County, Georgia. A Dynegy subsidiary will design and construct the generating facility, as agent for a third party, and Dynegy is obligated to guarantee approximately 90 percent of the actual cost of the F-23 83 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS project during the construction phase. It is anticipated that Dynegy will subsequently lease the completed facility from that third party for an initial term of five years. Under certain circumstances, the Company maintains an option to purchase the facility from the third party and it may participate in the outright sale of the asset. A wholly owned subsidiary of the Company leases a power-generating asset under an agreement that is classified as an operating lease. This agreement has aggregate future minimum lease payments of approximately $7.1 million at December 31, 1999. In 1997, Dynegy received cash from a gas purchaser as an advance payment for future natural gas deliveries over a ten-year period ("Advance Agreement"). As a condition of the Advance Agreement, Dynegy entered into a natural gas swap with a third party under which Dynegy became a fixed-price payor on identical volumes to those to be delivered under the Advance Agreement at prices based on then current market rates. The cash payment was classified as an advance on the balance sheet and is ratably reduced as gas is delivered to the purchaser under the terms of the Advance Agreement. In addition, the purchaser pays a monthly fee to Dynegy associated with delivered volumes. The Advance Agreement contains certain non-performance penalties that impact both parties and as a condition precedent, Dynegy purchased a surety bond in support of its obligations under the Advance Agreement. Minimum commitments in connection with office space, equipment, reservation charges under purchase and firm transportation contracts, power generating and other leased assets were: 2000 - $71.6 million; 2001 - $47.0 million; 2002 - $26.9 million; 2003 - $13.3 million; and 2004 and beyond - $100.6 million. Rental payments made under the terms of these arrangements totaled - $ 69.0 million in 1999, $126.1 million in 1998 and $85.2 million in 1997. NOTE 10 -- CAPITAL STOCK At December 31, 1999, the Company had authorized capital stock consisting of 450,000,000 shares, of which 50,000,000 shares, par value $0.01 per share, are designated preferred stock and 400,000,000 shares, par value $0.01 per share, are designated common stock. On the effective date of the Illinova acquisition, Dynegy had authorized capital as follows: o 300,000,000 shares of Class A common stock, no par value; o 120,000,000 shares of Class B common stock, no par value; o 70,000,000 shares of preferred stock, no par value. PREFERRED STOCK. The Company's preferred stock may be issued from time to time in one or more series, the shares of each series to have such designations and powers, preferences, rights, qualifications, limitations and restrictions thereof as described in the Company's Certificate of Incorporation. In order to provide for issuance of preferred shares pursuant to the terms of the Chevron Combination, 8,000,000 shares of preferred stock were designated during 1996 as Dynegy Series A Participating Preferred Stock ("Series A Preferred"), of which 7,815,363 shares were issued effective September 1, 1996. These shares remained outstanding at December 31, 1999. As part of the Illinova acquisition, these shares were converted to shares of Class B common stock of Dynegy on a 0.69-for-one exchange ratio. Pursuant to the terms of the Illinova acquisition, Dynegy established a series of preferred stock, designated as Series A Convertible Preferred Stock, which was issued to British Gas Atlantic and NOVA Corporation in accordance with the exchange ratios provided in the merger documents. On the effective date of the merger, BG and NOVA held an aggregate 6.7 million shares of this Series A Convertible Preferred Stock. Holders of this Series A preferred stock are entitled to receive dividends or distributions totaling $3.00 per share annually if and when declared by the Board of Directors of the Company out of funds legally available therefor. Dividends on the preferred shares are cumulative from the date of issuance and are payable quarterly on the last day of March, June, September and December. This F-24 84 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Series A Convertible Preferred Stock carries certain priority, liquidation, redemption, conversion and voting rights not available to the common shareholders. COMMON STOCK. At December 31, 1999, there were 157,499,001 shares of common stock issued and 1,200,700 shares were held in treasury. During 1999, Dynegy paid quarterly cash dividends on its common stock of $0.0125 per share, or $0.05 per share on an annual basis. Pursuant to the terms of the Illinova acquisition, Dynegy split its common shares into two classes, Class A and Class B. Generally, holders of Class A and Class B common stock are entitled to one vote per share on all matters to be voted upon by the shareholders. Holders of Class A common stock may cumulate votes in connection with the election of directors. The election of directors and all other matters will be by a majority of shares represented and entitled to vote, except as otherwise provided by law. Holders of Class B common stock vote together with holders of Class A common stock as a single class on every matter acted upon by the shareholders except for the following matters: o the holders of Class B common stock vote as a separate class for the election of three directors of Dynegy Inc., while the holders of Class A common stock vote as a separate class for the remaining directors; o any amendment to the special corporate governance rights of Class B common stock, must be approved by a majority of the directors elected by holders of Class B common stock attending a meeting where such amendment is considered and a majority of all Dynegy directors or by a 66 2/3 percent of the outstanding shares of Class B common stock voting as a separate class, and the affirmative vote of a majority of the shares of Class A and Class B common stock, voting together as a single class; and o any amendment to the provision of the articles of incorporation addressing the voting rights of holders of Class A and Class B common stock requires the approval of 66 2/3 percent of the outstanding shares of Class B common stock voting as a separate class, and the affirmative vote of a majority of the shares of Class A and Class B common stock, voting together as a single class. Subject to the preferences of the preferred stock, holders of Class A and Class B common stock have equal ratable rights to dividends out of funds legally available for that purpose, when and if dividends are declared by the board of directors. Holders of Class A common stock and Class B common stock are entitled to share ratably, as a single class, in all of the assets of Dynegy available for distribution to holders of shares of common stock upon the liquidation, dissolution or winding up of the affairs of Dynegy, after payment of Dynegy's liabilities and any amounts to holders of preferred stock. A share of Class B common stock automatically converts into a share of Class A common stock upon the transfer to any person other than an affiliate of Chevron. Additionally, each share of Class B common stock automatically converts into a share of Class A common stock if the holders of all Class B common stock cease to own collectively 15 percent of the outstanding common stock of Dynegy. Conversely, any shares of Class A common stock acquired by Chevron or its affiliates will automatically convert into shares of Class B common stock, so long as Chevron and its affiliates continue to own 15 percent or more of the outstanding voting power of Dynegy. Holders of Class A and Class B common stock generally are not entitled to preemptive rights, subscription rights, or redemption rights, except that, Chevron, who holds all of the shares of Class B common stock, is entitled to certain preemptive rights under the shareholders agreement. The rights and preferences of holders of Class A common stock are subject to the rights of any series of preferred stock Dynegy may issue. Beginning in 2000, Holders of Class A and Class B common stock will be entitled to a $0.60 per share dividend if, when and as declared by the Board of Directors of the Company out of funds legally available therefor. The Company has a stock repurchase program, approved by the Board of Directors, that allows it to repurchase, from time to time, up to 1.6 million shares of common stock (1.1 million shares as adjusted for the Illinova acquisition exchange ratio) in open market transactions. At December 31, 1999, approximately 399,000 F-25 85 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS shares (276,000 shares as adjusted for the Illinova acquisition exchange ratio) remained available for repurchase under this program. STOCK WARRANTS. At December 31, 1999, the Company had warrants outstanding that entitle the holder thereof to purchase an aggregate 6,228 shares of common stock at an exercise price of $8.13 per share. The warrants expire in October 2003. Such share and per share value amounts are before application of the exchange ratio pursuant to the Illinova acquisition. STOCK OPTIONS. Each option granted is valued at an option price, which ranges from $2.03 per share to the fair market value per share at date of grant. The difference between the option price and the fair market value, if any, of each option on the date of grant is recorded as compensation expense over a vesting period. Options granted at prices below fair market do not become exercisable until the fifth anniversary date of the grant, at which time they become fully exercisable. Options granted at market value vest and become exercisable ratably over a three-year period. The average exercise price of vested options at December 31, 1999 was $8.39. Compensation expense related to options granted totaled $6.0 million, $4.7 million and $4.0 million for the years ended December 31, 1999, 1998 and 1997, respectively. At December 31, 1999, employee stock options aggregating 7.2 million shares were exercisable at prices ranging from $2.03 to $21.63 per share. The Company adopted a new employee stock option plan subsequent to year-end which authorized the issuance of no more than five million common shares. Total options authorized and non-distributed Stock option transactions for 1999, 1998 and 1997 were (shares in thousands) as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------- 1999 1998 ---------------------------------------- ------------------------------------------ SHARES OPTION PRICE SHARES OPTION PRICE --------------- ---------------- ------------ -------------- Outstanding at beginning of period 18,679 $ 2.03 - 21.63 14,015 $ 2.03 - 21.63 Granted 3,046 2.03 - 22.94 7,319 2.03 - 17.50 Exercised (3,375) 2.03 - 18.88 (995) 2.03 - 9.38 Canceled or expired (893) 2.03 - 19.00 (1,568) 2.03 - 19.00 Other, contingent share issuance (50) 2.03 - 5.66 (92) 2.03 - 5.66 --------------- ---------------- ------------ -------------- Outstanding at end of period 17,407 $ 2.03 - 22.94 18,679 $ 2.03 - 21.63 =============== ================ ============ ============== Exercisable at end of period 7,234 $ 2.03 - 21.63 4,394 $ 2.03 - 21.63 =============== ================ ============ ============== Weighted average fair value of Options granted during the period At market $ 10.71 $ 5.77 ================ ============== Weighted average fair value of Options granted during the period At below market $ 13.32 $ 7.35 ================ ============== YEAR ENDED DECEMBER 31, ------------------------------------- 1997 ------------------------------------ SHARES OPTION PRICE ------------ -------------- Outstanding at beginning of period 13,920 $ 2.03 - 18.75 Granted 2,284 2.03 - 21.63 Exercised (1,469) 2.03 - 9.38 Canceled or expired (629) 2.03 - 18.75 Other, contingent share issuance (91) 2.03 - 5.66 ------------ -------------- Outstanding at end of period 14,015 $ 2.03 - 21.63 ============ ============== Exercisable at end of period 2,861 $ 2.03 - 18.75 ============ ============== Weighted average fair value of Options granted during the period At market $ 11.14 ============== Weighted average fair value of Options granted during the period At below market $ 14.63 ==============
Pursuant to terms of the Illinova acquisition, certain vesting requirements on outstanding options were accelerated and the option shares and strike prices were subject to the exchange ratios described in the merger documents. Additionally, Dynegy instituted new option plans on the effective date of the merger. At the effective date of the merger, the following shares were exercisable at the designated prices pursuant to Dynegy's option plans.
Exercisable at effective date 8,341 $ 2.94 - 31.35 ========== ==============
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions used for grants in 1999, 1998 and 1997: dividends per year of $0.05 per annum for all years; expected volatility of 40.3 percent, 40.1 percent and 42.0 percent, respectively; risk-free interest rate of 6.42 percent, 6.28 percent and 6.28 percent, respectively; and an expected life of 10 years for all periods. The Company accounts for its stock option plan in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had compensation cost been determined consistent F-26 86 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS with SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company's net income (loss) and per share amounts would have approximated the following pro forma amounts for the years ended December 31, 1999, 1998 and 1997, respectively.
YEARS ENDED DECEMBER 31, -------------------------------------------------------------------------------------- 1999 1998 1997 ---------------------------- ---------------------------- --------------------------- DILUTED LOSS DILUTED NET INCOME EPS NET LOSS PER SHARE NET INCOME EPS ------------- ------------- ------------- ------------- ------------ ------------ ($ IN THOUSANDS, EXCEPT PER SHARE DATA) Pro forma amounts $ 142,838 $ 0.86 $ 104,578 $ 0.63 $ (108,007) $ (0.72) ============= ============= ============= ============= ============ ============
NOTE 11 -- BUSINESS COMBINATIONS AND SIGNIFICANT RESTRUCTURINGS THE DESTEC ACQUISITION. On June 27, 1997, Dynegy acquired Destec Energy, Inc. ("Destec"), an independent power producer, for $1.26 billion, or $21.65 per share of Destec common stock. Dynegy financed the transaction through cash on hand and advances on its credit facilities provided by its existing commercial banks. Concurrent with this acquisition, Dynegy sold Destec's international facilities and operations to The AES Corporation ("AES") for $439 million. Also during 1997, the Company sold certain non-strategic assets acquired in the purchase for aggregate proceeds of $296 million. Proceeds from the AES and non-strategic asset sales were used to retire indebtedness. The Destec acquisition was accounted for under the purchase method of accounting. Accordingly, the purchase price of approximately $718 million, inclusive of transaction costs and net of cash acquired, was allocated to the Destec assets acquired and liabilities assumed based on their estimated fair values as of June 30, 1997, the effective date of the acquisition for accounting purposes. The results of operations of the acquired Destec assets are consolidated with Dynegy's existing operations beginning July 1, 1997. The following table reflects certain unaudited pro forma information for the year ended December 31, 1997 as if the Destec acquisition had occurred on January 1, 1996 (in thousands, except per share data):
YEAR ENDED DECEMBER 31, ------------ 1997 ------------ Pro forma revenues $ 13,498,207 Pro forma net loss (101,175) Pro forma loss per share (0.67)
RESTRUCTURING OF NOVAGAS CLEARINGHOUSE, LTD. In June 1997, the Company and NOVA Corporation ("NOVA") completed the restructuring of the companies' Canadian natural gas operations formerly executed through Novagas Clearinghouse, Ltd., Novagas Clearinghouse Limited Partnership and Novagas Clearinghouse Pipelines Limited Partnership (collectively "NCL"), a joint venture between Dynegy and NOVA. Pursuant to the agreements, Dynegy Canada Inc. ("DCI"), a wholly owned indirect subsidiary of Dynegy, acquired NCL's natural gas marketing business, excluding the natural gas aggregation business of Pan-Alberta Gas Ltd. ("Pan-Alberta"), from NCL and sold its aggregate 49.9 percent interest in NCL to NOVA Gas International ("NGI"), a subsidiary of NOVA. NOVA assumed full ownership of NCL's gathering and processing business and the operations of Pan-Alberta. The restructuring included amendments to or termination of various agreements between NCL, Dynegy, NOVA and certain affiliates of both Dynegy and NOVA. Dynegy realized a pretax gain on the sale of its interest in NCL of $7.8 million, which is classified as other income in the accompanying consolidated statements of operations for the year ended December 31, 1997. The acquisition by Dynegy of NCL's marketing business was accounted for under the purchase method of accounting. Accordingly, the purchase price of $4.0 million, inclusive of transaction costs, was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of April 1, 1997, the effective date of the acquisition for accounting purposes. F-27 87 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RESTRUCTURING OF ACCORD ENERGY LIMITED ("ACCORD"). In early 1997, British Gas completed a restructuring whereby Centrica plc ("Centrica") was demerged from British Gas and British Gas was renamed BG plc ("BG"). Centrica became the Company's joint venture partner in Accord. BG holds the approximate 26 percent stake in Dynegy's common stock formerly held by British Gas. On May 2, 1997, Centrica and the Company completed a restructuring of Accord by converting certain common stock interests in Accord to participating preferred stock interests as of an effective date of January 1, 1997. Centrica and the Company own 75 percent and 25 percent, respectively, of the outstanding participating preferred stock shares of Accord. The participating preferred stock has (a) the right to receive cumulative dividends on a priority basis to other corporate distributions by Accord, and (b) limited voting rights. In addition, Centrica has an option to purchase the Company's participating preferred stock interest at any time after July 1, 2000, at a formula based price, as defined in the agreement. As part of the reorganization, Centrica will operate Accord while Dynegy obtained the right to market natural gas, gas liquids and crude oil in the United Kingdom, which occurs through its wholly owned subsidiary Dynegy UK Limited ("Dynegy UK"). No gain or loss was recognized as a result of this restructuring and Dynegy's investment in Accord continues to be accounted for under the equity method. NOTE 12 -- IMPAIRMENT, ABANDONMENT AND OTHER CHARGES During the fourth quarter of 1997, the Company recognized a $275 million charge principally related to impairment of certain long-lived assets, abandonment of certain operating assets and reserves for obsolescence, contingencies and other obligations. The charge primarily resulted from the completion of a plan of restructuring of the Company's natural gas liquids and crude oil businesses, which includes rationalization and consolidation of assets acquired in both the Trident and Chevron Combinations, and the pursuit of a joint venture partner in order to achieve critical mass in its crude oil marketing business. In addition, a company-wide reorganization of reporting responsibilities and improvements in business processes and computer information systems resulted in the identification during the fourth quarter of 1997 of other obsolete assets and a reduction of employees involved in non-strategic operations. The charge, which was substantially non-cash in nature, consisted of the following (in thousands): 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, net of tax, represented the one-time charge for the aggregate unamortized re-engineering costs previously capitalized. F-28 88 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 -- EMPLOYEE COMPENSATION, SAVINGS AND PENSION PLANS CORPORATE INCENTIVE PLAN. Dynegy maintains a discretionary incentive plan to provide employees competitive and meaningful rewards for reaching corporate and individual objectives. Specific rewards are at the discretion of the Compensation Committee of the Board of Directors ("Compensation Committee"). PROFIT SHARING/SAVINGS PLAN. The Company established the Dynegy Profit Sharing/401(k) Savings Plan ("Plan"), which meets the requirements of Section 401(k) of the Internal Revenue Code, and is a defined contribution plan subject to the provisions of the Employee Retirement Income Security Act of 1974. The Plan and related trust fund are established and maintained for the exclusive benefit of participating employees in the United States and certain expatriates. Similar plans are available to other employees resident in foreign countries subject to the laws of each country. All eligible employees may participate in the plans and employee contributions are generally matched dollar-for-dollar for the first 5 percent of compensation, subject to Company performance. Employees vest in the Company's contributions over various periods. The Company also makes profit sharing contributions to employees' accounts regardless of their individual participation in the Profit Sharing/Savings Plans. Matching contributions to the Plan and certain discretionary profit sharing contributions are made in Company common stock, other contributions are made in cash. During the years ended December 31, 1999, 1998 and 1997, Dynegy recognized aggregate costs related to these employee compensation plans of $24.9 million, $12.9 million and $9.7 million, respectively. PENSION PLAN. Through a business acquisition, the Company acquired a noncontributory defined benefit pension plan and such plan remains in existence at December 31, 1999. The Trident NGL, Inc. Retirement Plan ("Retirement Plan") is a qualified plan under the Internal Revenue Service regulations. The Retirement Plan is closed to new participants. Benefits are based on years of service and final average pay, as defined in the Retirement Plan document. Contributions to the Retirement Plan in 1999 and 1998 represent the minimum amount required by federal law and regulation. The Retirement Plan's funded status and amount recognized in Dynegy's balance sheet at December 31, 1999 and 1998, were:
DECEMBER 31, ---------------------------- 1999 1998 ------------ ------------ ($ IN THOUSANDS) Projected benefit obligation, beginning of the year $ 11,755 $ 9,378 Service cost 545 665 Interest cost 718 722 Curtailment (1,940) -- Actuarial (gain) loss (1,102) 1,137 Benefits paid (216) (147) ------------ ------------ Projected benefit obligation, end of the year $ 9,760 $ 11,755 ============ ============ Fair value of plan assets, beginning of the year $ 9,345 $ 8,480 Actual return on plan assets 1,125 615 Employer contributions 41 397 Benefits paid (216) (147) ------------ ------------ Fair value of plan assets, end of the year $ 10,295 $ 9,345 ============ ============ Funded status $ (534) $ 2,410 Unrecognized net gain from past experience different from that assumed 4,995 3,668 ------------ ------------ Pension liability $ 4,461 $ 6,078 ============ ============
Current year pension expense is based on measurements of the projected benefit obligation and the market related value of the Retirement Plan assets as of the end of the year. The projected benefit obligation at December 31, 1999 and 1998, was based on a discount rate of 7.5 and 7.0 percent, and an average long-term rate of F-29 89 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS compensation growth of 3.5 percent, respectively. The expected long-term rate of return on the Retirement Plan assets was estimated at 8.0 percent in 1999 and 1998. The components of net pension expense for the Retirement Plan were:
YEARS ENDED DECEMBER 31, ---------------------------- 1999 1998 ------------ ------------ ($ IN THOUSANDS) Service cost benefits earned during period $ 545 $ 665 Interest cost on projected benefit obligation 718 722 Expected return on plan assets (717) (618) Amortization of unrecognized gain (182) (218) ------------ ------------ Net periodic pension cost $ 364 $ 551 ============ ============
NOTE 14 -- RELATED PARTY TRANSACTIONS Transactions between the Company and Chevron result principally from the ancillary agreements entered into as part of the Chevron Combination. Transactions with Chevron and transactions between Dynegy, NOVA and BG result from purchases and sales of natural gas, natural gas liquids and crude oil between subsidiaries of Dynegy and these companies. It is management's opinion that these transactions are executed at prevailing market rates. During the years ended December 31, 1999, 1998 and 1997, the Company recognized in its statement of operations aggregate sales to, and aggregate costs from, these significant shareholders of $1.1 billion and $2.0 billion, $888 million and $1.7 billion, and $788.9 million and $2.4 billion, respectively. Pursuant to the terms of the Illinova acquisition, NOVA and BG reduced their respective stakes in Dynegy to less than 5 percent. NOTE 15 -- SEGMENT INFORMATION The Company has adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" and has restated its segment disclosures for all reporting periods. Dynegy's operations are divided into two reportable segments: Energy Convergence and Midstream. The Energy Convergence segment is actively engaged in value creation through marketing and trading of natural gas, power and coal and the generation of electricity principally under the name Dynegy Marketing and Trade. The Midstream segment consists of the North American midstream liquids operations, as well as the international liquefied petroleum gas transportation and natural gas liquids marketing operations located in Houston and London, and certain other businesses. The North American midstream liquids operations are actively engaged in the gathering and processing of natural gas and the transportation, fractionation and storage of NGLs. This segment operates principally under the name Dynegy Midstream Services. Generally, Dynegy accounts for intercompany transactions at prevailing market rates. Operating segment information for 1999, 1998 and 1997 is presented below. F-30 90 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DYNEGY'S SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1999
ENERGY CONVERGENCE MIDSTREAM ELIMINATION TOTAL ------------ ------------ ------------ ------------ ($ IN THOUSANDS) Unaffiliated revenues: Domestic $ 9,855,757 $ 3,143,085 $ -- $ 12,998,842 Canadian 1,445,779 9,795 -- 1,455,574 United Kingdom 975,560 -- -- 975,560 ------------ ------------ ------------ ------------ 12,277,096 3,152,880 -- 15,429,976 ------------ ------------ ------------ ------------ Intersegment revenues Domestic 355,340 239,848 (595,188) -- Canadian 58,663 8,517 (67,180) -- United Kingdom -- -- -- -- ------------ ------------ ------------ ------------ 414,003 248,365 (662,368) -- ------------ ------------ ------------ ------------ Total revenues 12,691,099 3,401,245 (662,368) 15,429,976 ------------ ------------ ------------ ------------ Operating margin 283,594 260,281 -- 543,875 Depreciation and amortization (35,116) (94,342) -- (129,458) Interest expense (36,433) (41,731) -- (78,164) Interest and other income 57,453 15,834 -- 73,287 Equity earnings of unconsolidated affiliates 62,185 17,669 -- 79,854 Income tax (provision) benefit (58,098) (16,579) -- (74,677) Net income from operations 106,631 45,218 -- 151,849 Cumulative effect of change in accounting principle -- -- -- -- Net income 106,631 45,218 -- 151,849 Identifiable assets: Domestic $ 3,465,730 $ 2,549,773 $ -- $ 6,015,503 Canadian 266,338 68,107 -- 334,445 United Kingdom 175,223 -- -- 175,223 Investment in unconsolidated affiliates 458,552 168,783 -- 627,335 Capital expenditures 356,506 92,016 -- 448,522
F-31 91 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DYNEGY'S SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1998
ENERGY CONVERGENCE MIDSTREAM 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 236,275 192,412 -- 428,687 Depreciation and amortization (29,026) (84,176) -- (113,202) Interest expense (24,944) (50,048) -- (74,992) Interest and other income 6,763 40,058 -- 46,821 Equity earnings of unconsolidated affiliates 75,242 15,796 -- 91,038 Income tax (provision) benefit (52,262) 1,924 -- (50,338) Net income from operations 90,750 17,603 -- 108,353 Net income 90,750 17,603 -- 108,353 Identifiable assets: Domestic $ 2,838,367 $ 2,036,795 $ -- $ 4,875,162 Canadian 257,070 6,947 -- 264,017 United Kingdom 125,058 -- -- 125,058 Investment in unconsolidated affiliates 343,819 158,794 -- 502,613 Capital expenditures 359,516 118,948 -- 478,464
F-32 92 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DYNEGY'S SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1997
ENERGY CONVERGENCE MIDSTREAM 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 (20,228) (254,772) -- (275,000) Depreciation and amortization (16,425) (87,966) -- (104,391) Interest expense (12,214) (51,241) -- (63,455) Interest and other income 13,209 14,904 -- 28,113 Equity earnings of unconsolidated affiliates 36,241 22,718 -- 58,959 Income tax (provision) benefit (8,710) 70,920 -- 62,210 Net income (loss) from operations 24,321 (112,006) -- (87,685) Cumulative effect of change in accounting (7,289) (7,511) -- (14,800) principle Net income (loss) 17,033 (119,518) -- (102,485) Identifiable assets: Domestic $ 1,882,965 $ 2,299,312 $ -- $ 4,182,277 Canadian 239,090 40,900 -- 279,990 United Kingdom 54,635 -- -- 54,635 Investment in unconsolidated affiliates 310,445 160,032 -- 470,477 Capital expenditures 815,271 189,388 -- 1,004,659
F-33 93 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the Company's unaudited quarterly financial information for the years ended December 31, 1999 and 1998.
QUARTER ENDED ------------------------------------------------- MARCH JUNE SEPTEMBER DECEMBER 1999 1999 1999 1999 ---------- ---------- ---------- ---------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues $3,044,973 $3,160,757 $4,584,929 $4,639,317 Operating margin 120,077 125,747 158,814 139,237 Income before income taxes 40,683 41,510 75,434 68,899 Net income 28,071 27,976 50,692 45,110 Net income per share 0.17 0.17 0.30 0.26
QUARTER ENDED ------------------------------------------------- MARCH JUNE SEPTEMBER DECEMBER 1998 1998 1998 1998 ---------- ---------- ---------- ---------- ($ 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 (loss) before income taxes 16,411 35,043 63,739 43,498 Net income (loss) 12,339 23,441 43,645 28,928 Net income (loss) per share (1) 0.07 0.14 0.27 0.18
1. Net income (loss) per share amounts have been restated to conform to the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." NOTE 17 - SUBSEQUENT EVENTS ILLINOVA ACQUISITION. Dynegy completed its acquisition of Illinova early in the first quarter 2000. The merger of Dynegy and Illinova involved the creation of a new holding company, now known as Dynegy Inc., and two separate but concurrent mergers. In one concurrent merger, a wholly-owned subsidiary of Dynegy Inc. merged with and into Illinova. In the other concurrent merger, a second wholly-owned subsidiary of Dynegy Inc. merged with and into old Dynegy. As a result of these two concurrent mergers, Illinova and old Dynegy continue to exist as wholly-owned subsidiaries of Dynegy Inc., and are referred to as Illinova Holding and Dynegy Holding, respectively. Dynegy accounted for the merger as a purchase of Illinova. This accounting treatment is based on various factors present in the merger, including the majority ownership (and voting control) of Dynegy's shareholders following the merger, the role of Dynegy's management following the merger (including the service of C.L. Watson as Chairman and Chief Executive Officer) and the influence of Chevron because of the size of its ownership interest and its rights F-34 94 DYNEGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS under the shareholder agreement, articles of incorporation and bylaws. As a result, the consolidated financial statements of Dynegy after the merger will reflect the assets and liabilities of Dynegy Holding at historical book values and the assets and liabilities of Illinova at allocated fair values. For accounting purposes, the effective date of the merger will be January 1, 2000. This date was selected as a result of the following factors: o Affirmative consent had been acquired from both shareholder groups prior to January 1, 2000, o All regulatory consents had been acquired prior to January 1, 2000, o Material terms of the purchase and sale agreement for the qualifying facilities, a condition precedent to the closing, had been negotiated on or about January 1, 2000, and o Board, executive, commercial, financial and regulatory oversight of Illinova's operations had transferred to Dynegy on or about January 1, 2000. In the combination, Dynegy shareholders, other than Chevron U.S.A. Inc. ("Chevron"), NOVA Gas Services (U.S.) Inc. ("NOVA") and BG Holdings, Inc., elected to exchange each Dynegy share for 0.69 of a share of Dynegy Class A common stock, based on a fixed exchange ratio, or elected to receive $16.50 per share in cash consideration, subject to proration. NOVA and BG Holdings, Inc. elected cash and thereby reduced their respective ownership in Dynegy as part of this combination. Therefore, instead of receiving Dynegy Class A common stock in exchange for their respective shares of Dynegy Holding common stock, NOVA and the parent of BG Holdings, Inc. each received a combination of cash, subject to proration, and shares of Dynegy Series A Convertible Preferred Stock. Chevron received shares of Dynegy Class B common stock in exchange for all of its shares of Dynegy Holding common stock and Series A Preferred, respectively. Additionally, as part of the combination, Chevron purchased $200 million of additional Dynegy Class B common stock. Each share of Illinova common stock was converted into one share of Dynegy Class A common stock. Immediately after the combination, former Dynegy shareholders owned approximately 51 percent of the outstanding shares of Dynegy. Approximately 60 percent of the consideration received by existing Dynegy shareholders was in the form of Dynegy stock and 40 percent was cash. In aggregate, the cash portion of the consideration approximated $1.07 billion. Dynegy financed the cash component of the merger initially with borrowings under a debt facility and the issuance of $200 million of Class B common stock to Chevron. Dynegy anticipates repaying or refinancing a significant portion of the debt facility with proceeds from an offering of equity securities, additional public debt issuances, proceeds from asset sales and cash flow from operations. ASSET DISPOSITIONS. In early 2000, the Company entered into agreements to dispose of certain assets for aggregate net proceeds approximating $560 million. In addition, the Company has stated its intent to dispose of its domestic crude oil marketing operations, likely in the first quarter 2000. These transactions result from statutory requirements pursuant to the acquisition of Illinova or for the purpose of eliminating operating assets considered non-strategic or which were under-performing in comparison to other assets in the portfolio. The net proceeds received in these transactions are being used to retire merger-related debt or are being re-deployed into the Company's capital investment program. The financial impact of these transactions in the aggregate is not expected to be material to Dynegy's results of operations or financial position for the year ended December 31, 2000. Further, disposition of these assets is not expected to have a material adverse effect on Dynegy's prospective competitive position in the businesses in which it operates. The assets sold consist of nine cogeneration facilities designated as qualifying facilities under PURPA law and substantially all of the Company's natural gas processing facilities and related infrastructure in the Mid-Continent region. F-35 95 SCHEDULE I DYNEGY INC. CONDENSED BALANCE SHEETS OF REGISTRANT (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ ASSETS CURRENT ASSETS Cash $ -- $ 209,439 Accounts receivable 3,209 500 Intercompany accounts receivable 709,119 446,959 Prepayments and other assets 9,471 6,773 ------------ ------------ 721,799 663,671 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT 3,246 3,297 Less: accumulated depreciation (2,825) (2,587) ------------ ------------ 421 710 ------------ ------------ OTHER ASSETS Investments in affiliates 1,763,922 1,514,635 Intercompany note receivable 500,590 343,311 Deferred taxes and other assets 30,308 22,225 ------------ ------------ $ 3,017,040 $ 2,544,552 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Intercompany accounts payable $ -- $ 155,131 Accrued liabilities 126,546 146,100 ------------ ------------ 126,546 301,231 LONG-TERM DEBT 1,299,333 913,000 COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST 200,000 200,000 OTHER LIABILITIES 81,679 2,258 ------------ ------------ 1,707,558 1,416,489 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, 50,000,000 shares Authorized: 8,000,000 shares designated as Series A Participating Preferred Stock, 7,815,363 shares issued and Outstanding at December 31, 1999 and 1998 75,418 75,418 Common stock, $0.01 par value, 400,000,000 shares Authorized: 157,499,001 shares issued at December 31, 1999, and 153,298,220 shares issued at December 31, 1998 1,575 1,533 Additional paid-in capital 973,000 935,183 Retained earnings 277,074 133,340 Less: treasury stock, at cost: 1,200,700 shares at December 31, 1999 1,200,700 shares at December 31, 1998 (17,585) (17,411) ------------ ------------ 1,309,482 1,128,063 ------------ ------------ $ 3,017,040 $ 2,544,552 ============ ============
See Note to Registrant's Financial Statements. F-36 96 SCHEDULE I DYNEGY INC. STATEMENTS OF OPERATIONS OF THE REGISTRANT FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999 (IN THOUSANDS)
1999 1998 1997 ------------ ------------ ------------ Depreciation and amortization $ (238) $ (241) $ (1,292) Impairment, abandonment and other charges -- (959) (3,886) ------------ ------------ ------------ Operating loss (238) (1,200) (5,178) Equity in earnings of affiliates 249,287 215,928 (115,108) Intercompany interest and other income 65,325 13,667 16,928 Interest expense (82,825) (68,403) (45,790) Other expenses (5,023) (1,301) (747) ------------ ------------ ------------ Income (loss) before income taxes 226,526 158,691 (149,895) Income tax provision (benefit) 74,677 50,338 (62,210) ------------ ------------ ------------ Net income (loss) from continuing operations before cumulative effect of change in accounting 151,849 108,353 (87,685) Cumulative effect of change in accounting principle (net of income tax benefit of $7,913) -- -- (14,800) ------------ ------------ ------------ NET INCOME (LOSS) $ 151,849 $ 108,353 $ (102,485) ============ ============ ============
See Note to Registrant's Financial Statements. F-37 97 SCHEDULE I DYNEGY INC. STATEMENTS OF CASH FLOWS OF THE REGISTRANT FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999 (IN THOUSANDS)
1999 1998 1997 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 151,849 $ 108,353 $ (102,485) Items not affecting cash flows from operating activities: Depreciation and amortization 238 1,864 9,631 Equity in earnings of affiliates, net of cash distributions (249,287) (215,928) 115,108 Deferred taxes 63,167 50,338 (86,424) Other -- -- 12,344 Change in assets and liabilities resulting from operating activities: Accounts receivable (2,709) (468) 76 Intercompany transactions (574,518) 239,586 636,063 Prepayments and other assets (2,698) (2,212) (2,749) Accrued liabilities 8,939 3,693 1,529 Other, net 25,043 (29,778) 2,493 ------------ ------------ ------------ Net cash used in operating activities (579,976) 155,448 585,586 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures -- -- (5,121) Acquisitions -- (2,644) (785,349) Other -- -- -- ------------ ------------ ------------ Net cash used in investing activities -- (2,644) (790,470) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings 397,488 212,259 2,218,500 Repayments of long-term borrowings -- (493,277) (2,198,000) Net proceeds from commercial paper and money market lines of credit (42,161) 350,758 -- Intercompany advances -- -- -- Proceeds from sale of capital stock, options and warrants 21,855 3,863 203,190 Treasury stock acquisitions (174) (6,905) (10,506) Capital contributions -- -- -- Dividends and other distributions (8,115) (7,988) (7,925) Other financing 1,644 (2,450) -- ------------ ------------ ------------ Net cash provided by financing activities 370,537 56,260 205,259 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents (209,439) 209,064 375 Cash and cash equivalents, beginning of period 209,439 375 -- ------------ ------------ ------------ Cash and cash equivalents, end of period $ -- $ 209,439 $ 375 ============ ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid (net of amount capitalized) $ 97,540 $ 100,589 $ 60,323 ============ ============ ============ Taxes paid (net of refunds) $ 1,927 $ (8,000) $ 8,043 ============ ============ ============ Cash dividends paid to parent by consolidated or unconsolidated subsidiaries $ -- $ -- $ -- ============ ============ ============
See Note to Registrant's Financial Statements. F-38 98 SCHEDULE I DYNEGY INC. NOTE TO REGISTRANT'S FINANCIAL STATEMENTS NOTE 1 -- BASIS OF PRESENTATION Dynegy Inc. ("Dynegy" or the "Company") is a holding company that principally conducts all of its business through its subsidiaries. The Company is the result of a strategic business combination ("Trident Combination") between Natural Gas Clearinghouse and Trident NGL Holding, Inc. ("Holding"), under which Holding was renamed NGC Corporation. Pursuant to the terms of the Trident Combination, Holding was the legally surviving corporation and Clearinghouse was considered the acquiring company for accounting purposes resulting in a new historical cost basis for Holding beginning March 1, 1995, the effective date of the Trident Combination. During 1998, the Company changed its name to Dynegy Inc. in order to reflect its evolution from a natural gas marketing company to an energy services company capable of meeting the growing demands and diverse challenges of the dynamic energy market of the 21st Century. The accompanying condensed Registrant Financial Statements were prepared pursuant to rules promulgated by the Securities and Exchange Commission. In accordance with these rules, the accompanying statements reflect the financial position, results of operations and cash flows of Dynegy, the holding company of Dynegy Inc., at December 31, 1999 and 1998, and for the years then ended through December 31, 1999, respectively. These statements should be read in conjunction with the Consolidated Statements and notes thereto of Dynegy Inc. F-39 99 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION 2.1 - Agreement and Plan of Merger among Dynegy Inc., Illinova Corporation and certain other parties named therein (15) 2.2 - Amendment to Agreement and Plan of Merger among Dynegy Inc., Illinova Corporation and other parties named therein (18) 2.3 - Combination Agreement and Plan of Merger, dated May, 22, 1996, by and between NGC Corporation, Chevron U.S.A. Inc. and Midstream Combination Corp.(7) 2.4 - Amendment to Combination Agreement, dated as of August 29, 1996, by and among NGC Corporation, Chevron U.S.A. Inc. and Midstream Combination Corp.(5) 2.5 - Agreement and Plan of Merger by and among Destec Energy, Inc., The Dow Chemical Company, NGC Corporation and NGC Acquisition Corporation II dated as of February 17, 1997. (8) 2.6 - Asset Purchase Agreement by and between NGC Corporation and The AES Corporation dated as of February 17, 1997. (8) 2.7 - First Amendment to Asset Purchase Agreement by and between NGC Corporation and The AES Corporation dated June 29, 1997.(9) 2.8 - Asset Purchase Agreement between Destec Energy, Inc. and ECT EOCENE Enterprises, Inc. dated July 1, 1997.(9) 3.1 - Articles of Incorporation of the Company (18) 3.2 - Articles of Amendment to the Company's Articles of Incorporation (18) 3.3 - Articles of Amendment to the Company's Articles of Incorporation (19) +3.4 - Amended and Restated Bylaws of Dynegy Inc. 3.5 - Statement of Resolution Establishing Series of Series A Convertible Preferred Stock filed with the Illinois Secretary of State on February 1, 2000. (19) 4.1 - Warrant exercisable for 6,228 shares of Common Stock of NGC Corporation registered in the name of J. Otis Winters. (2) 4.2 - Indenture, dated as of December 11, 1995, by and between NGC Corporation, the Subsidiary Guarantors named therein and the First National Bank of Chicago, as Trustee.(4) 4.3 - First Supplemental Indenture, dated as of August 31, 1996, by and among NGC Corporation, the Subsidiary Guarantors named therein, and The First National Bank of Chicago, as Trustee, supplementing and amending the Indenture dated as of December 11, 1995. (5) 4.4 - Second Supplemental Indenture, dated as of October 11, 1996, by and among NGC Corporation, the Subsidiary Guarantors named therein, and The First National Bank of Chicago, as Trustee, supplementing and amending the Indenture dated as of December 11, 1995. (5) 4.5 - Amended and Restated Credit Agreement dated as of June 27, 1997, among NGC Corporation and The First National Bank of Chicago, Individually and as Agent, The Chase Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents, and the Lenders Named therein.(9) 4.6 - First Amendment to Amended and Restated Credit Agreement, dated November 24, 1997, among NGC Corporation and The First National Bank of Chicago, Individually and as Agent, The Chase Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents for the Lenders named therein. (13) 4.7 - Second Amendment to Amended and Restated Credit Agreement, dated as of February 20, 1998, among NGC Corporation and The First National Bank of Chicago, Individually and as Agent, The Chase Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents for the Lenders named therein. (13) 4.8 - Subordinated Debenture Indenture between NGC Corporation and The First National Bank of Chicago, as Debenture Trustee, dated as of May 28, 1997. (10) 4.9 - Amended and Restated Declaration of Trust among NGC Corporation, Wilmington Trust Company, as Property Trustee and Delaware Trustee, and the Administrative Trustees named therein, dated as of May 28, 1997. (10) 4.10 - Series A Capital Securities Guarantee executed by NGC Corporation and The First National Bank of Chicago, as Guarantee Trustee, dated as of May 28, 1997. (10)
100
EXHIBIT NUMBER DESCRIPTION 4.11 - Common Securities Guarantee of NGC Corporation dated as of May 28, 1997. (10) 4.12 - Registration Rights Agreement, dated as of May 28, 1997, among NGC Corporation, NGC Corporation Capital Trust I, Lehman Brothers, Salomon Brothers Inc. and Smith Barney Inc. (10) 4.13 - Second Supplemental Indenture among NGC Corporation, Destec Energy, Inc. and The First National Bank of Chicago, as Trustee, dated as of June 30, 1997, supplementing and amending the Indenture dated as of June 30, 1997. (11) 4.14 - Fourth Supplemental Indenture among NGC Corporation, Destec Energy, Inc. and The First National Bank of Chicago, as Trustee, dated as of June 30, 1997, supplementing and amending the Indenture dated as of December 11, 1995. (11) 4.15 - Fifth Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee, dated as of September 30, 1997, supplementing and amending the Indenture dated as of December 11, 1995. (13) 4.16 - Sixth Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee, dated as of January 5, 1998, supplementing and amending the Indenture dated as of December 11, 1995. (13) 4.17 - Seventh Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee, dated as of February 20, 1998, supplementing and amending the Indenture dated as of December 11, 1995. (13) 4.18 - Indenture, dated as of September 26, 1996, restated as of March 23, 1998, to include amendments in the First through Fifth Supplemental Indentures, between NGC Corporation and The First National Bank of Chicago, as Trustee. (13) 4.19 - Credit Agreement dated as of May 27, 1998, among NGC Corporation and The First National Bank of Chicago, Individually and as Administrative Agent, The Chase Manhattan Bank, Individually and as Syndication agent and NationsBank, N.A., Individually and as Documentation Agent and the Lenders named therein. (12) 4.20 - 364-Day Revolving Credit Agreement dated as of May 27, 1998, among NGC Corporation and The First National Bank of Chicago, Individually and as Administrative Agent, The Chase Manhattan Bank, Individually and as Syndication agent and NationsBank, N.A., Individually and as Documentation Agent and the Lenders named therein. (12) 4.21 - First Amendment to 364-Day Revolving Credit dated as of May 5, 1999 among Dynegy Inc. and The First National Bank of Chicago, Individually and as Administrative Agent, The Chase Manhattan Bank, Individually and as Syndication Agent, and Citibank N.A., Individually and as Documentation Agent and the Lenders Named therein. (17) 10.1 - Agreement of Sale and Purchase of Assets, dated as of May 5, 1991, as amended on June 6, 1991 and August 30, 1991, by and between OXY USA Inc. and Trident Energy, Inc. (1) 10.2 - Master Agreement on Gas Processing, dated as of May 5, 1991, by and between OXY USA Inc. and Trident NGL, Inc.(1) 10.3 - Dynegy Inc. Amended and Restated 1991 Stock Option Plan. (16) 10.4 - Dynegy Inc. 1998 U.K. Stock Option Plan (16)
101
EXHIBIT NUMBER DESCRIPTION 10.5 - Dynegy Inc. Amended and Restated Employee Equity Option Plan. (16) +10.6 - Dynegy Inc. 1999 Long Term Incentive Plan. +10.7 - Dynegy 2000 Long Term Incentive Plan. 10.8 - Employment Agreement dated April 2, 1996 by and between NGC Corporation and Stephen A. Furbacher.(6) +10.9 - Employment Agreement, effective February 1, 2000, between Charles L. Watson and Dynegy Inc. +10.10 - Employment Agreement, effective February 1, 2000, between Stephen W. Bergstrom and Dynegy Inc. +10.11 - Employment Agreement, effective February 1, 2000, between John U. Clarke and Dynegy Inc. +10.12 - Employment Agreement, effective February 1, 2000, between Kenneth E. Randolph and Dynegy Inc. 10.13 - Employment Agreement, dated as of July 1, 1997, by and between Dan Ryser and NGC Corporation. 10.14 - Lease Agreement entered into on June 12, 1996 between Metropolitan Life Insurance Company and Metropolitan Tower Realty Company, Inc., as landlord, and NGC Corporation, as tenant. (6) 10.15 - First Amendment to Lease Agreement entered into on June 12, 1996 between Metropolitan Life Insurance Company and Metropolitan Tower Realty Company, Inc., as landlord, and NGC Corporation, as tenant. (6) 10.16 - Contribution and Assumption Agreement, dated as of August 31, 1996, among Chevron U.S.A. Inc., Chevron Pipe Line Company, Chevron Chemical Company and Midstream Combination Corp. (5) 10.17 - Scope of Business Agreement, dated May 22, 1996 between Chevron Corporation and NGC Corporation. (6) 10.18 - Master Alliance Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc., Chevron Chemical Company, Chevron Pipe Line Company, and other Chevron U.S.A. Inc. affiliates, NGC Corporation, Natural Gas Clearinghouse, Warren Petroleum Company, Limited Partnership, Electric Clearinghouse, Inc. and other NGC Corporation affiliates. (5) * 10.19 - Natural Gas Purchase and Sale Agreement, dated as of August 30, 1996, among Chevron U.S.A. Inc. and Natural Gas Clearinghouse. (5) * 10.20 - Master Natural Gas Processing Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership. (5) * 10.21 - Master Natural Gas Liquids Purchase Agreement, dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron U.S.A. Inc. (5) * 10.22 - Gas Supply and Service Agreement, dated as of September 1, 1996, among Chevron Products Company and Natural Gas Clearinghouse. (5)
102
EXHIBIT NUMBER DESCRIPTION 10.23 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc. and Chevron U.S.A. Production Company. (6) 10.24 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc. and Chevron Chemical Company. (6) 10.25 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc. and Chevron Products Company. (6) * 10.26 - Feedstock Sale and Refinery Product Purchase Agreements, dated as of September 1, 1996, among Chevron Products Company and Warren Petroleum Company, Limited Partnership.(5) * 10.27 - Refinery Product Sale Agreement (Hawaii), dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron Products Company. (5) * 10.28 - Feedstock Sale and Refinery Product Master Services Agreement, dated as of September 1, 1996, among Chevron Products Company and Warren Petroleum Company, Limited Partnership. (5) * 10.29 - CCC Product Sale and Purchase Agreement dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron Chemical Company. (5) * 10.30 - CCC/WPC Services Agreement, dated as of September 1, 1996, among Chevron Chemical Company and Warren Petroleum Company, Limited Partnership. (5) * 10.31 - Operating Agreement, dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron Pipe Line Company. (5) 10.32 - Galena Park Services Agreement, dated as of September 1, 1996, among Chevron Products Company and Midstream Combination Corp. (5) * 10.33 - Venice Complex Operating Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership. (6) * 10.34 - Time Charter, dated as of August 31, 1996, by and between Midstream Barge Company, L.L.C. and Warren Petroleum Company, Limited Partnership. (5) * 10.35 - Limited Liability Company Agreement of Midstream Barge Company, L.L.C., dated as of August 31, 1996, by and between Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership. (5) 10.36 - Subscription Agreement between Energy Convergence Holding Company and Chevron U.S.A. Inc (15) 10.37 - Stock Purchase Agreement between Energy Convergence Holding Company and British Gas Atlantic Holdings BV and related Guaranty by British Gas Overseas Holdings Limited (15) 10.38 - Voting Agreement between Illinova and BG Holdings, Inc. (15) 10.39 - Voting Agreement between Illinova and NOVA Gas Services (U.S.) Inc. (15) 10.40 - Voting Agreement between Illinova and Chevron U.S.A. Inc. (15) 10.41 - Shareholder Agreement of Energy Convergence Holding Company with Chevron U.S.A. Inc. (15)
103
EXHIBIT NUMBER DESCRIPTION 10.42 - Registration Rights Agreement (NOVA Gas Services (U.S.) Inc. and British Gas Atlantic Holdings BV) (15) 10.43 - First Amended and Restated Limited Partnership Agreement of the West Texas LPG Pipeline Limited Partnership (17) 10.44 - Amended and Restated Operating Agreement of the West Texas LPG Pipeline Limited Partnership and Chevron Pipeline Company (17) 10.45 - Dynegy Inc. Severance Pay Plan. (16) 10.46 - Registration Rights Agreement (Chevron U.S.A. Inc) (15) 10.47 - First Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17) 10.48 - Amendment No. 1 to the First Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17) 10.49 - Second Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17) 10.50 - Third Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17) 10.51 - Fourth Supplemental Plan to the Dynegy Inc. Severance Pay Plan (17) 10.52 - Dynegy Midstream Services, Limited Partnership Supplemental Severance Pay Plan (17) 10.53 - NGC Profit Sharing/401(k) Savings Plan. (16) 10.54 - First Amendment to NGC Profit Sharing/401(k) Savings Plan. (16) 10.55 - Second Amendment to NGC Profit Sharing/401(k) Savings Plan. (16) 10.56 - Third Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. (17) +10.57 - Fourth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. +10.58 - Fifth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. +10.59 - Sixth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. +10.60 - Seventh Amendment to Dynegy Inc. Profit Sharing/401(k) Savings Plan. + 12.1 - Computation of Ratio of Earnings to Fixed Charges. + 22.1 - Subsidiaries of the Registrant. + 23.1 - Consent of Arthur Andersen LLP. + 27.1 - Financial Data Schedule.
- ------------------- + Filed herewith 104 * Exhibit omits certain information which the Company has filed separately with the Commission pursuant to a confidential treatment request pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended. (1) Incorporated by reference to exhibits to the Registration Statement of Trident NGL, Inc. on Form S-1, Registration No. 33-43871. (2) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1993 of Trident NGL Holding, Inc., Commission File No. 1-11156. (3) Incorporated by reference to exhibits to the Registration Statement of Trident NGL Holding, Inc. on Form S-4, Registration No. 33-88907. (4) Incorporated by reference to the Registration Statement of NGC Corporation on Form S-3, Registration No. 33-97368. (5) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1996, of NGC Corporation, Commission File No. 1-11156. (6) Incorporated by reference to exhibits to the Registration Statement of Midstream Combination Corp. on Form S-4, Registration No. 333-09419. (7) Incorporated by reference to exhibits to the Current Report on Form 8-K of NGC Corporation, dated May 22, 1996, Commission File No. 1-11156. (8) Incorporated by reference to exhibits to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1996, of NGC Corporation, Commission File No. 1-11156. (9) Incorporated by reference to exhibits to the Current Report on Form 8-K of NGC Corporation, Commission File No. 1-11156, dated June 27, 1997. (10) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1997, Commission File No. 1-11156. (11) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1997, Commission File No. 1-11156 (12) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1998, Commission File No. 1-11156. (13) Incorporated by reference to exhibits to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997, of NGC Corporation, Commission File No. 1-11156. (14) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period ended September 30, 1998, Commission File No. 1-11156. (15) Incorporated by reference to exhibits to the Current Report on Form 8-K of Dynegy Inc. dated June 14, 1999. (16) Incorporated by reference to exhibits to the Annual Report in Form 10-K of the Fiscal Year Ended December 31, 1998, of Dynegy Inc., Commission File No. 1-11156. (17) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1999, Commission File No. 1-11156. (18) Incorporated by reference to exhibits to Amendment No. 1 to the Registration Statement on Form S-4 of Energy Convergence Holding Company filed with the Securities and Exchange Commission on September 7, 1999. (19) Incorporated by reference to exhibits to Registration Statement on Form 8-A of Dynegy Inc. (b) Reports on Form 8-K of Dynegy Inc.. None. EX-3.4 2 AMENDED BYLAWS OF DYNEGY INC. 1 EXHIBIT 3.4 AS AMENDED FEBRUARY 2, 2000 BY RESOLUTION 2000-3 DYNEGY INC. AMENDED AND RESTATED BYLAWS ARTICLE I CORPORATE OFFICES Section 1. Illinois Registered Office. The registered office of the corporation in the State of Illinois may, but need not, be identical with the principal office in the State of Illinois, and the address of the registered office may be changed from time to time by the board of directors. Section 2. Other Offices. The principal office of the corporation in the State of Illinois shall initially be located in the City of Decatur and County of Macon. The corporation may also have offices at such other places both within and without the State of Illinois as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. Times and Places of Meetings. Meetings of shareholders for any purpose may be held at such time and place, within or without the State of Illinois, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual Meetings. Annual meetings of shareholders, commencing with the year 2000, shall be held on the 1st of May if not a legal holiday, and if a legal holiday, then on the next business day following, or at such other time as may be provided in a resolution by the board of directors, for the purpose of electing directors and for the transaction of such other business as may properly be brought before the meeting. If the election of directors shall not be held on the day designated herein for any annual meeting, or at any adjournment thereof, the board of directors shall cause the election to be held at a meeting of the shareholders as soon thereafter as conveniently may be. Section 3. Special Meetings. Special meetings of shareholders may be called by the chairman of the board, the chief executive officer, the president, the board directors, or the holders of not less than one-fifth of all the outstanding shares entitled to vote on the matter for which the meeting is called. 2 Section 4. Notice of Meetings. Written notice stating the place, day and hour of the meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than sixty days before the date of the meeting, or in the case of a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets, not less than twenty nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, chief executive officer, president or the secretary or other persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at the shareholder's address as it appears on the records of the corporation, with postage thereon prepaid. Section 5. Waiver of Notice. Whenever any notice whatsoever is required to be given under the provisions of the Business Corporation Act or the articles of incorporation or these by-laws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Attendance at any meeting shall constitute waiver of notice thereof unless the person at the meeting objects to the holding of the meeting because proper notice was not given. Section 6. Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty days and, for a meeting of shareholders, not less than ten days, or in the case of a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets, not less than twenty days, immediately preceding such meeting or other action. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the board of directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided herein, such determination shall apply to any adjournment thereof. Section 7. Voting Lists. The officer or agent having charge of the transfer books for shares of the corporation shall make, within twenty days after the record date for a meeting of shareholders or ten days before such meeting, whichever is earlier, a complete list of the shareholders entitled to vote at such meeting, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten days prior to such meeting, shall be kept on file at the registered office of the corporation and shall be subject to inspection by any shareholder, and to copying at the shareholder's expense, at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original share ledger or transfer book, or a duplicate thereof kept in this State, shall be prima facie evidence as to who are the shareholders entitled to examine such list or share ledger or transfer book or to vote at any meeting of shareholders. 2 3 Section 8. Quorum. A majority of the outstanding shares entitled to vote on a matter, represented in person or by proxy, shall constitute a quorum for consideration of such matter at any meeting of shareholders; provided, that if less than a majority of such outstanding shares are represented at the meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice until a quorum shall attend. If a quorum is present, the affirmative vote of the majority of such shares represented at the meeting and entitled to vote on a matter shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the Business Corporation Act, the articles of incorporation or these by-laws. Section 9. Proxies. A shareholder may appoint a proxy to vote or otherwise act for that shareholder by signing a proxy appointment form and delivering it to the person so appointed. Such proxy shall be filed with the secretary of the corporation before the time of the meeting. No proxy shall be valid after eleven months from the date thereof, unless otherwise provided in the proxy. Every proxy continues in full force and effect until revoked by the person executing it prior to the vote thereon, except to the extent such proxy is irrevocable under applicable law. Such revocation may be effected by a writing delivered to the secretary of the corporation stating that the proxy is revoked, or by a subsequent proxy executed by, or by attendance at the meeting and voting in person by, the person executing the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. Section 10. Voting of Shares. Except as otherwise provided by the articles of incorporation or by resolutions of the board of directors providing for the issue of any shares of preferred or special classes in series, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders. Section 11. Voting of Shares by Certain Holders. Shares registered in the name of another corporation, domestic or foreign, may be voted by any officer, agent, proxy or other legal representative authorized to vote such shares under the law of incorporation of such corporation. The corporation may treat the president or other person holding the position of chief executive officer of such other corporation as authorized to vote such shares, together with any other person indicated and any other holder of an office indicated by the corporate shareholder to the corporation as a person or an office authorized to vote such shares. Such persons and offices indicated shall be registered by the corporation on the transfer books for shares and included in any voting list prepared in accordance with the Business Corporation Act and these by-laws. Shares registered in the name of a deceased person, a minor ward or a person under legal disability may be voted by his administrator, executor or court-appointed guardian, either in person or by proxy, without a transfer of such shares into the name of such administrator, executor or court-appointed guardian. Shares registered in the name of a trustee may be voted by such trustee, either in person or by proxy. Shares registered in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into the receiver's name if authority so to do is contained in an appropriate order of the court by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to 3 4 vote the shares so transferred. Shares of the corporation owned by the corporation shall not be voted, directly or indirectly, at any meeting and shall not be counted in determining the total number of outstanding shares entitled to vote at any given time, but shares of the corporation held by the corporation in a fiduciary capacity may be voted and shall be counted in determining the total number of outstanding shares entitled to vote at any given time. Section 12. Inspectors. The board of directors, in advance of any meeting of shareholders, may appoint one or more persons as inspectors to act at such meeting or any adjournment thereof. If inspectors of election are not so appointed, the chairman of the meeting may, or upon the request of any shareholder shall, appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting, based upon their determination of the validity and effect of proxies; count all votes and report the results; and do such other acts as are proper to conduct the election and voting with impartiality and fairness to all the shareholders. Each report of an inspector shall be in writing and signed by the inspector or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof. Section 13. Voting by Ballot. Voting on any question or in any election may be by voice vote unless the presiding officer shall order that voting be by ballot. Section 14. Organization of Meetings. At each meeting of shareholders, one of the following officers shall act as chairman and shall preside thereat, in the following order of precedence: the chairman of the board; the president; any vice president acting in place of the president as provided by these by-laws; any person designated by the affirmative vote of the holders of a majority of the shares represented at the meeting in person or by proxy and entitled to vote. Section 15. Notice of Shareholder Business and Nominations. (A) Annual Meetings of Shareholders. (1) Nominations of persons for election to the board of directors of the corporation and the proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders (a) pursuant to the corporation's notice of meeting, (b) by or at the direction of the board of directors, (c) as expressly provided in the corporation's articles of incorporation, or (d) by any shareholder of record of the corporation at the relevant time, provided that shareholders of common stock of the corporation (the "COMMON STOCK SHAREHOLDERS") comply with the notice procedures set forth in Section 15(A)(2)-(3) below. (2) For nominations or other business to be properly brought before an annual meeting by a Common Stock Shareholder, such shareholder must have given timely notice thereof in writing to the secretary of the corporation and such other business must be a proper matter for shareholder action. To be timely, the Common Stock Shareholder's notice shall be delivered to the secretary of the corporation at the principal executive offices of the corporation 4 5 not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a Common Stock Shareholder's notice as described above. Such shareholder's notice shall set forth: (a) as to each person whom the shareholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "EXCHANGE Act"), and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business described to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such shareholder, as they appear on the corporations' book and of such beneficial owner and (ii) the class and number of shares of the corporation which are owned beneficially and of record by such shareholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Section 15 to the contrary and except with respect to the first annual meeting of the corporation, in the event that the number of directors to be elected to the board of directors of the corporation is increased and there is no public announcement naming the nominees for director or specifying the size of the increased board of directors made by the corporation at least 100 days prior to the first anniversary of the preceding year's annual meeting, a Common Stock Shareholder's notice required by this Section 15 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary of the corporation at the principal executive offices of the corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the corporation. (B) Special Meetings of Shareholders. Only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting pursuant to a notice of meeting given pursuant to Section 4 of this Article II. Nominations of persons for election to the board of directors may be made at a special meeting of shareholders at which directors are to be elected pursuant to the corporation's notice of meeting (1) by or at the direction of the board of directors or (2) by any shareholder of the corporation who is a shareholder of record at the time of giving of notice provided for in this Section 15, who shall be entitled to 5 6 vote at the meeting and who complies with the notice procedures set forth in this Section 15. In the event the corporation calls a special meeting of shareholders for the purpose of electing one or more directors to the board of directors, any such shareholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the corporation's notice of meeting, if the shareholder's notice required by paragraph (A)(2) of this Section 15 shall be delivered to the secretary of the corporation at the principal executive office of the corporation not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the board of directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a shareholder's notice as described above. (C) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 15 shall be eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 15. Except as otherwise provided by law, the articles of incorporation of the corporation or these by-laws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in this Section 15 and, if any proposed nomination or business is not in compliance with this Section 15, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this Section 15, "PUBLIC ANNOUNCEMENT" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 15, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder, if any, with respect to the matters set forth in this Section 15. Nothing in this Section 15 shall be deemed to affect any rights of (i) shareholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) the holders of any series of preferred shares of the corporation to elect directors under specified circumstances. (4) No provision of this Section 15 shall apply to the election of any Class B Director (as defined in the Articles of Incorporation). 6 7 ARTICLE III DIRECTORS Section 1. Powers. The business and affairs of the corporation shall be managed by or under the direction of its board of directors. Section 2. Tenure and Qualifications. Each director shall hold office until the next annual meeting of shareholders following his or her election and until his or her successor shall have been duly elected and qualified or until his or her earlier death, resignation or removal. A director need not be a resident of the State of Illinois or a shareholder of the corporation. A director may resign at any time by giving written notice to the board of directors, or to the chairman of the board, chief executive officer, president or secretary of the corporation. A resignation shall be effective when the notice is given, unless the notice specifies a future date. In addition to the directors who shall be elected by the shareholders of the corporation, the board of directors may also designate, by resolution of the Board, an advisory director who shall be entitled to attend all meetings of the board, but shall not be entitled to vote on any matters before the board. Except as set forth in this Section 2, the advisory director shall have no rights as a director either under these Bylaws, Dynegy's charter, Illinois law or any other agreement to which the corporation is a party. Notwithstanding the foregoing, an advisory director shall be entitled to receive compensation for his or her services as a director in the same amount and manner that such director would be entitled to receive compensation as an employee director or non-employee director, as the case may be, if such director were elected by the stockholders of the corporation." Section 3. Place of Meetings. The board of directors of the corporation may hold meetings, both regular and special, either within or without the State of Illinois. Section 4. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this by-law, immediately after, and at the same place as, the annual meeting of shareholders. Other regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. Section 5. Special Meetings. Special meetings of the board of directors may be called by the chairman of the board and shall be called by the chairman of the board or secretary on the written request of three directors or the sole director, as the case may be. Section 6. Notice. Notice of any special meeting shall be given: (i) at least five days prior thereto if the notice is given personally or by an electronic transmission, (ii) at least five business days prior thereto if the notice is given by having it delivered by a third party entity that provides delivery services in the ordinary course of business and guarantees delivery of the notice to the director no later than the following business day, and (iii) at least seven business days prior thereto if the notice is given by mail. Notice of any meeting where any actions described in Section 7.(B) will be considered shall be given to Class B directors at least 30 days before the vote on any such action and shall set forth the material terms thereof. For this 7 8 purpose, the term "ELECTRONIC TRANSMISSION" may include, but shall not be limited to, a facsimile, email or other electronic means. Notice shall be delivered to the director's business address and/or telephone number and shall be deemed given upon electronic transmission, upon delivery to the third party delivery service, or upon being deposited in the United States mail with postage thereon prepaid. Any director may waive notice of any meeting by signing a written waiver of notice either before or after the meeting. Attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except when a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. Section 7. Quorum; Vote Required, Actions Requiring Approval. (A) Except as provided in Section 7.(B), a majority of the directors then in office, but not less than a majority of the minimum number of directors specified by the articles of incorporation for the variable range of the number of directors, shall constitute a quorum for the transaction of business at any meeting of the board of directors, and the act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. If less than a majority of such number of directors are present at the meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. (B) Notwithstanding anything to the contrary herein, so long as any shares of Class B Common Stock of the corporation are issued and outstanding and the holders of Class B Common Stock have not terminated their rights to block such actions granted to them under Section 4.1 of the Shareholder Agreement between the corporation and Chevron U.S.A., Inc., dated June 13, 1999, the corporation shall not take (or permit to be taken in its capacity as a shareholder or partner or otherwise permit any subsidiary of the corporation to take) any of the following actions if all of the Class B directors present at the meeting where such action is considered vote against such action: (1) amendment of Article II, Section 15(C)(4), Article III, Sections 6, 7.(B), 7.(C), or 12, Article IV, Section 1, Article V, Section 1, or Article IX of these Bylaws, or amendment of Article IV, Section 2A. of the articles of incorporation of the corporation; (2) adoption of any provision of these Bylaws or amendment to the articles of incorporation which would substantially and adversely affect the rights of the holders of the Class B Common Stock. (3) authorization of new shares of any stock of the corporation where the aggregate consideration to be received by the corporation therefor exceeds the greater of (a) $1 billion or (b) one-quarter of the Corporation's Market Capitalization; (4) any disposition of all or substantially all of the corporation's Liquids Business (defined below) or Gas Marketing Business (as defined below), so long as there shall 8 9 be in effect any substantial agreements between Chevron U.S.A. Inc. and Dynegy relating to such businesses, except for a contribution of such Liquids Business to a joint venture, limited liability company or other form of partnership in which the corporation has a majority direct or indirect interest; (5) any merger or consolidation of the corporation or any subsidiary (other than a merger or consolidation by a subsidiary with the corporation or another subsidiary), any joint venture, any liquidation or dissolution of the corporation, any voluntary initiation of a proceeding in bankruptcy or acquiescence to an involuntary initiation of a proceeding in bankruptcy, any acquisition of stock or assets by the corporation or its subsidiaries, or any issuance of common or preferred stock by the corporation, any of which would result in the payment or receipt of consideration (including the incurrence or assumption of indebtedness and liabilities) having a fair market value exceeding the greater of (a) $1 billion or (b) one-quarter of the Corporation's Market Capitalization (as defined below); or (6) any other material transaction (or series of related transactions) which would result in the payment or receipt of consideration (including the incurrence or assumption of indebtedness and liabilities) having a fair market value exceeding the greater of (a) $1 billion or (b) one-quarter of the Corporation's Market Capitalization, and is out of the ordinary course of business for the corporation. For purposes of this Section, the "CORPORATION'S MARKET CAPITALIZATION" means the sum of (a) the product of (x) the total number of shares outstanding of Class A and Class B Common Stock of the corporation on the relevant date and (y) the closing price of the Class A Common Stock on the New York Stock Exchange ("NYSE") at the end of the regular session represented by the consolidated tape, Network A, (b) the product of (x) the total number of shares outstanding of all of the corporation's NYSE traded preferred stock on the relevant date and (y) the closing price of such preferred stock on the NYSE at the end of the regular session represented by the consolidated tape, Network A and (c) the aggregate value of the liquidation preference of any non-NYSE listed non-convertible stock of the corporation and (d) the aggregate value of the greater of the liquidation preference and the value of the underlying common stock (calculated in accordance with (a) of this paragraph) issuable upon conversion of any non-NYSE listed convertible preferred stock on the relevant date. The "LIQUIDS BUSINESS" means the processing of natural gas to produce natural gas liquids, the fractionation of natural gas liquids, and the purchase, sale and transportation of such natural gas liquids. The "Gas Marketing Business" shall mean the purchase, receipt, sale and delivery of natural gas, excluding the retail gas distribution business conducted by Illinova Corporation ("ILLINOVA") and its affiliates prior to the closing of the transactions contemplated by the Agreement and Plan of Merger, dated as of June 13, 1999, by and among the Corporation, Illinova, Dynegy, Inc., Energy Convergence Acquisition Corporation, and Dynegy Acquisition Corporation. (C) The executive officers of the Corporation shall advise the members of the Board of Directors of the consideration of a proposal relating to any matter of the type described in Section 7.(B) at such time as they determine to give substantive attention to such proposal. 9 10 Section 8. Informal Action by Directors. Any action required to be taken at a meeting of the board of directors, or any other action which may be taken at a meeting of the board of directors or a committee thereof, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all the directors entitled to vote with respect to the subject matter thereof, or by all the members of such committee, as the case may be. The consent shall be evidenced by one or more written approvals, each of which sets forth the action taken and bears the signature of one or more directors. All the approvals evidencing the consent shall be delivered to the secretary to be filed in the corporate records. The action taken shall be effective when all the directors have approved the consent unless the consent specifies a different effective date. Any such consent signed by all the directors or all the members of a committee shall have the same effect as a unanimous vote, and may be stated as such in any document filed with the Secretary of State of Illinois under the Business Corporation Act. Section 9. Participation with Communications Equipment. Members of the board of directors or of any committee of the board of directors may participate in and act at any meeting of such board or committee through the use of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other. Participation in such meeting shall constitute attendance and presence in person at the meeting of the person or persons so participating. Section 10. Compensation of Directors. The board of directors shall have the authority to fix the compensation of directors by the affirmative vote of a majority of the directors then in office and irrespective of any personal interest of any of its members. In addition, the directors may be paid their expenses, if any, of attendance at each meeting of the board of directors. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be compensated additionally for so serving. Section 11. Presumption of Assent. A director of the corporation who is present at a meeting of the board of directors at which action on any corporate matter is taken shall be conclusively presumed to have assented to the action taken unless the dissent of that director shall be entered in the minutes of the meeting or unless that director shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered or certified mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. Section 12. Agenda Items. No action may be taken at a meeting of the board of directors with respect to any matter that was not previously set forth on an agenda for such meeting delivered to the directors at least two business days prior to such meeting if either a majority of the Class B Directors present at such meeting or a majority of the other directors present at such meeting oppose taking action at such meeting with respect to such matter. 10 11 ARTICLE IV COMMITTEES OF THE BOARD OF DIRECTORS Section 1. Establishment of Committees. A majority of the directors may create one or more committees and appoint members of the board of directors to serve on the committee or committees. Each committee shall have two or more members, who serve at the pleasure of the board of directors. The board of directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of such committee. Any vacancy in a committee may be filled by the board of directors. Each committee shall keep regular minutes of its meetings and report the same to the board of directors as required. Unless precluded by applicable law or any applicable rule of the New York Stock Exchange, Inc., each committee other than the Nomination Committee shall have at least one Class B Director thereon. Section 2. Manner of Acting. Unless the appointment by the board of directors requires a greater number, a majority of any committee shall constitute a quorum and a majority of a quorum shall be necessary for action by any committee. A committee may act by unanimous consent in writing without a meeting. Each committee, by majority vote of its members, shall determine the time and place of meetings and the notice required therefor. Section 3. Authority of Committees. To the extent specified by resolution of the board of directors and these by-laws, each committee may exercise the authority of the board of directors, provided, however, a committee may not: a) authorize distributions, except for dividends to be paid with respect to shares of any preferred or special classes or any series thereof; b) approve or recommend to shareholders any act requiring the approval of shareholders under applicable law; c) fill vacancies on the board or any committee; d) elect or remove officers or fix the compensation of any member of the committee; e) adopt, amend or repeal these by-laws; f) approve a plan of merger not requiring shareholder approval; g) authorize or approve reacquisition of shares, except according to a general formula or method prescribed by the board of directors; h) authorize or approve the issuance or sale, or contract for sale, of shares, or determine the designation and relative rights, preferences, and limitations of a series of shares, except the board may direct that a committee may fix the specific terms of the issuance or sale or contract for sale, or the number of shares to be allocated to particular employees under an employee benefit plan; or 11 12 i) amend, alter, repeal, or take action inconsistent with any resolution or action of the board of directors when the resolution or action of the board of directors provides by its terms that it shall not be amended, altered or repealed by action of a committee. Section 4. (a) Executive Committee. The Board of Directors shall establish an Executive Committee. The Executive Committee, during intervals between meetings of the Board of Directors, shall have, and may exercise, subject to the limitations contained in Section 3 of this Article, the powers of the Board of Directors in the management of the business and affairs of the corporation. (b) Compensation Committee. The Board of Directors shall establish a Compensation Committee consisting of directors who are not otherwise employed by the corporation. The Compensation Committee shall review from time to time, the salaries, compensation and employee benefits (other than option plans and grants) for the executive officers and employees of the corporation and make recommendations to the board of directors concerning such matters. (c) Nomination Committee. The Board of Directors shall establish a Nomination Committee consisting of directors who are not otherwise employed by the corporation. The Nomination Committee shall consider matters related to corporate governance, develop general criteria regarding the selection and qualifications for members of the Board of Directors and recommend candidates for election to the Board of Directors. (d) Options Committee. The Board of Directors shall establish an Options Committee comprised solely of independent "disinterested" directors. The Options Committee shall be responsible for all aspects of the Company's stock plans including plan administration, and shall review and recommend to the Board of Directors new plans or changes to current plans, including increasing the number of shares reserved for such plans." (e) Finance Committee. The Board of Directors shall establish a Finance Committee. The Finance Committee shall review major financial decisions of the corporation and make recommendations to the Board of Directors concerning such matters. (f) Audit Committee. The Board of Directors shall establish an Audit Committee consisting solely of independent, "disinterested" directors. The Audit Committee shall review the selection and qualifications of the independent public accountants employed by the corporation to audit the financial statements of the corporation and the scope and adequacy of their audits, consider recommendations made by such independent public accountants, review internal financial audits of the 12 13 corporation, and report any additions or changes it deems necessary to the Board of Directors." (g) Risk and Environmental Committee. The Board of Directors shall establish a Risk and Environmental Committee consisting of directors who are not otherwise employed by the corporation. The Risk and Environmental Committee shall consider matters related to insurance and environmental issues and shall make recommendations to the Board of Directors concerning such matters. ARTICLE V OFFICERS Section 1. Officers. The officers of the corporation shall consist of a chief executive officer, chairman of the board, president, one or more vice presidents (the number, seniority and any other designations thereof to be determined by the board of directors), a secretary, a treasurer, a controller, and such other officers as may be elected by the board of directors. Any two or more offices may be held by the same person. Section 2. Additional Officers and Agents. The board of directors may appoint such other officers and agents as it shall deem necessary, who shall exercise such powers and perform such duties as shall be determined from time to time by the board. Section 3. Compensation of Officers. The compensation of all officers and agents of the corporation shall be fixed by or under the direction of the board of directors. No officer shall be prevented from receiving such compensation by reason of the fact that such officer is also a director of the corporation. Section 4. Term of Office and Vacancy. Each elected officer shall hold office until a successor is elected and qualified or until such officer's earlier resignation or removal. Any vacancy occurring in any office of the corporation shall be filled by the board of directors for the unexpired portion of the term. Each appointed officer shall serve at the pleasure of the board of directors. Election or appointment of an officer or agent shall not of itself create contract rights. Section 5. Removal. Any officer or agent may be removed by the board of directors whenever in its judgment the best interests of the corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. Section 6. Chief Executive Officer. The chairman of the board may, but need not, be the chief executive officer of the corporation. The chief executive officer shall (a) determine and administer the policies of the corporation, subject to the instructions of the board of directors; (b) be authorized to execute all documents in the name and on behalf of the corporation; and (c) perform all duties incident to the office of chief executive officer and such other duties as the board of directors or bylaws may from time to time prescribe. 13 14 Section 7. Chairman of the Board. The chairman of the board, or in his or her absence, the president, shall preside at all meetings of the shareholders and the board of directors. Section 8. President. The president shall (a) be the chief operating officer of the corporation, and shall in general be in charge of the operations of the corporation, subject to the control of the board of directors; (b) be authorized to execute all documents in the name and on behalf of the corporation; and (c) perform all duties incident to the office of president and such other duties as the board of directors may from time to time prescribe. Section 9. Vice Presidents. In the absence of the president or in the event of the inability or refusal of the president to act, the vice president (or in the event there is more than one vice president, the vice presidents in the order of seniority of title, or in the event of equal seniority, then in the order designated, or in the absence of any designation, then in the order named in the most recent resolution providing for the annual election of officers) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. Any vice president shall perform such other duties and have such other powers as the board of directors or the chief executive officer or president may from time to time prescribe. Section 10. Secretary. The secretary shall (a) attend meetings of the board of directors and meetings of the shareholders and record minutes of the proceedings of the meetings of the shareholders and of the board of directors, and when required, shall perform like duties for the committees of the board; (b) assure that all notices are duly given in accordance with the provisions of these by-laws or as required by law; (c) maintain custody of the corporate records of the corporation; (d) keep or cause to be kept a register of the post office address of each shareholder as furnished to the secretary by such shareholder; (e) sign with the chief executive officer, president or a vice president certificates for shares of the corporation, the issuance of which shall have been authorized by resolution of the board of directors; (f) have charge of the stock transfer books of the corporation and authority over a stock transfer agent, if any; (g) certify copies of the bylaws, resolutions of the shareholders and board of directors and committees thereof and other documents of the corporation as true and correct copies thereof; and (h) perform all duties incident to the office of secretary and such other duties as the board of directors or the chief executive officer or president may from time to time prescribe. Section 11. Assistant Secretaries. The assistant secretary, or if there is more than one, the assistant secretaries, respectively, as authorized by the board of directors, may sign with the president or a vice president certificates for shares of the corporation, the issuance of which shall have been authorized by resolution of the board of directors, and shall, in the absence of the secretary or in the event of the inability or refusal of the secretary to act, perform the duties and exercise the powers of the secretary, and shall perform such other duties as the board of directors, chief executive officer, president or secretary may from time to time prescribe. Section 12. Treasurer. The treasurer shall (a) have custody of the funds and securities of the corporation; (b) deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors; (c) maintain adequate accounts of the corporation; (d) disburse the funds of the corporation as 14 15 may be ordered by the board of directors; (e) submit financial statements to the president and the board of directors; and (f) perform all duties incident to the office of treasurer and such other duties as the board of directors or the chief executive officer or president may from time to time prescribe. Section 13. Assistant Treasurers. The assistant treasurer, or if there is more than one, the assistant treasurers, respectively, as authorized by the board of directors, shall, in the absence of the treasurer or in the event of the inability or refusal of the treasurer to act, perform the duties and exercise the power of the treasurer and shall perform such other duties and have such other power as the board of directors, the chief executive officer, president or treasurer may from time to time prescribe. Section 14. Controller. The controller shall conduct the accounting activities of the corporation, including the maintenance of the corporation's general and supporting ledgers and books of account, operating budgets, and the preparation and consolidation of financial statements. Section 15. General Powers of Officers. The chairman of the board, chief executive officer, president, any executive vice president, senior vice president and any vice president, may sign without countersignature or attestation any deeds, mortgages, bonds, contracts, reports to public agencies, or other instruments whether or not the board of directors has expressly authorized execution of such instruments, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors or by these by-laws solely to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed. Any other officer of this corporation may sign contracts, reports to public agencies, or other instruments which are in the regular course of business and within the scope of his or her authority, except where the signing and execution thereof shall be expressly delegated by the board of directors or by these by-laws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed. ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 1. Contracts. The board of directors may authorize any officer or officers, or agent or agents, to enter into any contract and execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. Section 2. Checks, Drafts, Notes. All checks, drafts or other orders for the payment of money, notes and other evidences of indebtedness, issued in the name of the corporation, shall be signed by such officer or officers, or agent or agents, of the corporation and in such manner as shall from time to time be determined by resolution of the board of directors. 15 16 Section 3. Deposits. All funds of the corporation other than petty cash shall be deposited to the credit of the corporation in such banks, trust companies or other depositories as the board of directors may select. ARTICLE VII SHARES Section 1. Issued Shares. The issued shares of the corporation may be represented by certificates, or may be uncertificated shares, in either case in whole or in part, as determined and authorized by the board of directors. Section 2. Certificates for Shares. Certificates representing shares of the corporation shall be in such form as may be determined by the board of directors. Such certificates shall be signed by the chairman of the board, chief executive officer or president and by the secretary or an assistant secretary. If a certificate is countersigned by a transfer agent or registrar, other than the corporation itself or its employee, any other signatures or countersignature on the certificate may be facsimiles. If any officer of the corporation, or any officer or employee of the transfer agent or registrar, who has signed or whose facsimile signature has been placed upon such certificate ceases to be an officer of the corporation, or an officer or employee of the transfer agent or registrar, before such certificate is issued, the certificate may be issued by the corporation with the same effect as if the officer of the corporation, or the officer or employee of the transfer agent or registrar, had not ceased to be such at the date of its issue. Certificates for shares shall be individually numbered or otherwise individually identified. Each certificate for shares shall state the name of the registered owner of the shares in the stock ledger, the number and the class and series, if any, of such shares, and the date of issuance of the certificate. If the corporation is authorized to issue more than one class of stock, a full summary or statement of all of the designations, preferences, qualifications, limitations, restrictions, and special or relative rights of each class authorized to be issued, and, if the corporation is authorized to issue any preferred or special class in series, the variations in the relative rights and preferences among such series, shall be set forth upon the face or back of the certificate. Such statement may be omitted if it shall be set forth upon the face or back of the certificate that such statement, in full, will be furnished by the corporation to any shareholder upon request and without charge. Section 3. Uncertificated Shares. The board of directors may provide by resolution that some or all of any or all classes and series of its shares shall be uncertificated shares, and may provide an election by individual shareholders to receive certificates or uncertificated shares and the conditions of such election, provided that such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Within a reasonable time after the registration of issuance or transfer of uncertificated shares, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to the Business Corporation Act or these by-laws. Except as otherwise expressly provided by law, the rights and obligations of the holders of uncertificated shares and rights and obligations of the holders of certificates representing shares of the same class and series shall be identical. 16 17 Section 4. Registration of Transfers of Shares. Transfers of shares shall be registered in the records of the corporation upon request by the registered owner thereof in person or by a duly authorized attorney, upon presentation to the corporation or to its transfer agent (if any) of a duly executed assignment and other evidence of authority to transfer, or proper evidence of succession, and, if the shares are represented by a certificate, a duly endorsed certificate or certificates for shares surrendered for cancellation, and with such proof of the authenticity of the signatures as the corporation or its transfer agent may reasonably require. The person in whose name shares are registered in the stock ledger of the corporation shall be deemed the owner thereof for all purposes as regards to the corporation. Section 5. Lost Certificates. The corporation may issue a new share, certificate in the place of any certificate theretofore issued by it, alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact, by the person claiming the share certificate to be lost, stolen or destroyed. When authorizing such issuance of a new certificate or certificates the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or the owner's legal representative, to advertise the same in such manner as it shall require or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate or certificates alleged to have been lost, stolen or destroyed. ARTICLE VIII OTHER PROVISIONS Section 1. Distributions. The board of directors may authorize, and the corporation may make, distributions to its shareholders, subject to any restriction in the articles of incorporation and subject to any limitations provided by law. Section 2. Fiscal Year. The fiscal year of the corporation shall be fixed, and shall be subject to change, by the board of directors. Section 3. Seal. The board of directors may, but shall not be required to, provide by resolution for a corporate seal, which may be used by causing it, or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. ARTICLE IX EMERGENCY BY-LAWS Section 1. Emergency Board of Directors. In the event a quorum of the board of directors cannot readily be convened for action due to (a) an attack or imminent attack on the United States or any of its possessions, (b) any nuclear or atomic disaster, or (c) any other catastrophe or emergency condition, the vacant director positions shall be filled by the following persons (provided in each case such person is not already a director and is willing and able to serve) in the following order: the president, the vice presidents in order of seniority, the 17 18 treasurer, the secretary, any other officers in order of seniority and any other persons in such order as named by the board of directors on any list as it may compile from time to time for purposes of appointing such successor directors; provided, however, that to the extent possible, the holders of Class B Common Stock shall be entitled to nominate a number of directors to such board of directors proportionate to the representation on the board of directors immediately prior to such emergency condition to which the holders of Class B Common Stock were entitled. Such new board of directors shall be referred to as the emergency board of directors of the corporation. The initial Chairman of the Board of the emergency board of directors ("CHAIRMAN") shall be the regularly-elected director, if any, who has served on the board of directors for the longest period of time and, if all directors on the emergency board of directors are successor directors appointed pursuant to this Section, the Chairman shall be determined according to the same order of priority as such successor directors are appointed pursuant to this Section. The directors appointed pursuant to this Section shall serve until the next annual or special meeting of shareholders at which directors are to be elected or until the emergency condition shall have terminated. Section 2. Powers. The emergency board of directors shall have all of the rights, powers and duties of the board of directors except such emergency board of directors may not amend the Articles of Incorporation of the corporation nor approve a merger, sale of all or substantially all of the assets of the corporation, liquidation or dissolution. Section 3. Notice of Meetings. Notice of any meeting of the emergency board of directors held during any emergency described in Section l of this Article IX may be given only to such directors or successor directors as it may be feasible to reach at the time and by such means as may be feasible at the time, including, without limitation, publication or radio. Section 4. Liability. No officer, director or employee of the corporation acting in accordance with this Article IX shall be liable to the corporation, except for willful misconduct. Section 5. By-laws. To the extent not inconsistent with this Article IX, the by-laws of the corporation shall remain in effect during any emergency described in Section l of this Article IX. Section 6. Interpretation. If, by operation of law or otherwise, any of the provisions of this Article IX are deemed to be invalid or not controlling, such provisions shall be construed by any court or agency having competent jurisdiction as a determinative factor evidencing the intent of the corporation. ARTICLE X AMENDMENTS Subject to the provisions of the Articles of Incorporation, these by-laws may be altered, amended or repealed, and new by-laws may be adopted, by the board of directors; provided that no amendment or repeal of Article II, Section 15(c)(4), Article III, Sections 6, 7.(B), 7.(C) or 12, Article IV, Section 1, Article V, Section 1, or Article IX, Section 1, nor the adoption of any 18 19 provision of these Bylaws which would substantially and adversely affect the rights of the holders of Class B Common Stock shall be effective except upon the approval of the affirmative vote of the majority of the Class B directors and a majority of the entire number of directors then in office. Subject to the provisions of the articles of incorporation, these by-laws may also be altered, amended or repealed by the shareholders of the corporation. ARTICLE XI INDEMNIFICATION OF EMPLOYEES AND AGENTS The corporation may indemnify any agent or employee of the corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (including, but not limited to any such proceeding by or in the right of the corporation) whether civil, criminal, administrative or investigative, by reason of the fact that he is or was serving the corporation at its request and in the course and scope of his duties and acting in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, against expenses (including reasonable attorney's fees) actually and reasonably incurred by him in connection with the defense or settlement of such action, suit or proceeding. 19 EX-10.6 3 1999 LONG TERM INCENTIVE PLAN 1 EXHIBIT 10.6 DYNEGY INC. 1999 LONG TERM INCENTIVE PLAN I. PURPOSE The purpose of the DYNEGY INC. 1999 LONG TERM INCENTIVE PLAN (the "Plan") is to provide a means through which DYNEGY INC., a Delaware corporation (the "Company"), and its subsidiaries may attract able persons to enter the employ of the Company and its affiliates and to provide a means whereby those individuals upon whom the responsibilities of the successful administration and management of the Company and its affiliates rest, and whose present and potential contributions to the welfare of the Company and its affiliates are of importance, can acquire and maintain stock ownership, thereby strengthening their concern for the welfare of the Company and its affiliates. A further purpose of the Plan is to provide such individuals with additional incentive and reward opportunities designed to enhance the profitable growth of the Company and its affiliates. Accordingly, the Plan provides for granting Incentive Stock Options, options that do not constitute Incentive Stock Options, Restricted Stock Awards, Performance Awards, and Phantom Stock Awards, or any combination of the foregoing, as is best suited to the circumstances of the particular employee as provided herein. II. DEFINITIONS The following definitions shall be applicable throughout the Plan unless specifically modified by any paragraph: (a) "AFFILIATE" means any corporation, partnership, limited liability company or partnership, association, trust or other organization which, directly or indirectly, controls, is controlled by, or is under common control with, the Company. For purposes of the preceding sentence, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any entity or organization, shall mean the possession, directly or indirectly, of the power (i) to vote more than 50% of the securities having ordinary voting power for the election of directors of the controlled entity or organization, or (ii) to direct or cause the direction of the management and policies of the controlled entity or organization, whether through the ownership of voting securities or by contract or otherwise. (b) "AWARD" means, individually or collectively, any Option, Restricted Stock Award, Performance Award or Phantom Stock Award. (c) "BOARD" means the Board of Directors of the Company. (d) "CODE" means the Internal Revenue Code of 1986, as amended. Reference in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section. 2 (e) "COMMITTEE" means a committee of the Board that is selected by the Board as provided in Paragraph IV(a). (f) "COMMON STOCK" means the common stock, par value $.01 per share, of the Company, or any security into which such Common Stock may be changed by reason of any transaction or event of the type described in Paragraph XI. (g) "COMPANY" means Dynegy Inc., a Delaware corporation. (h) "DIRECTOR" means an individual elected to the Board by the stockholders of the Company or by the Board under applicable corporate law who is serving on the Board on the date the Plan is adopted by the Board or is elected to the Board after such date. (i) An "EMPLOYEE" means any person (including a Director) in an employment relationship with the Company or any Affiliate. (j) "FAIR MARKET VALUE" means, as of any specified date, the mean of the high and low sales prices of the Common Stock reported on the stock exchange composite tape on that date, or, if no prices are reported on that date, on the last preceding date on which such prices of the Common Stock are so reported. In the event Common Stock is not publicly traded at the time a determination of its value is required to be made hereunder, the determination of its fair market value shall be made by the Committee in such manner as it deems appropriate. (k) "HOLDER" means an employee who has been granted an Award. (l) "INCENTIVE STOCK OPTION" means an incentive stock option within the meaning of section 422 of the Code. (m) "1934 ACT" means the Securities Exchange Act of 1934, as amended. (n) "OPTION" means an Award granted under Paragraph VII of the Plan and includes both Incentive Stock Options to purchase Common Stock and Options that do not constitute Incentive Stock Options to purchase Common Stock. (o) "OPTION AGREEMENT" means a written agreement between the Company and a Holder with respect to an Option. (p) "PERFORMANCE AWARD" means an Award granted under Paragraph IX of the Plan. (q) "PERFORMANCE AWARD AGREEMENT" means a written agreement between the Company and a Holder with respect to a Performance Award. (r) "PHANTOM STOCK AWARD" means an Award granted under Paragraph X of the Plan. -2- 3 (s) "PHANTOM STOCK AWARD AGREEMENT" means a written agreement between the Company and a Holder with respect to a Phantom Stock Award. (t) "PLAN" means the Dynegy Inc. 1999 Long Term Incentive Plan, as amended from time to time. (u) "RESTRICTED STOCK AGREEMENT" means a written agreement between the Company and a Holder with respect to a Restricted Stock Award. (v) "RESTRICTED STOCK AWARD" means an Award granted under Paragraph VIII of the Plan. (w) "RULE 16B-3" means SEC Rule 16b-3 promulgated under the 1934 Act, as such may be amended from time to time, and any successor rule, regulation or statute fulfilling the same or a similar function. (x) "STOCK APPRECIATION RIGHT" shall have the meaning assigned to such term in Paragraph VII(d) of the Plan. III. EFFECTIVE DATE AND DURATION OF THE PLAN The Plan shall become effective upon the date of its adoption by the Board, provided the Plan is approved by the stockholders of the Company within twelve months thereafter. Notwithstanding any provision in the Plan, no Option shall be exercisable and no Award shall vest or become satisfiable prior to such stockholder approval. No further Awards may be granted under the Plan after ten years from the date the Plan is adopted by the Board. The Plan shall remain in effect until all Options granted under the Plan have been exercised or expired, all Restricted Stock Awards granted under the Plan have vested or been forfeited, and all Performance Awards and Phantom Stock Awards have been satisfied or expired. IV. ADMINISTRATION (a) COMPOSITION OF COMMITTEE. The Plan shall be administered by a committee of, and appointed by, the Board, and such committee shall be comprised solely of two or more outside Directors (within the meaning of the term "outside directors" as used in section 162(m) of the Code and applicable interpretive authority thereunder and within the meaning of "Non-Employee Director" as defined in Rule 16b-3). (b) POWERS. Subject to the express provisions of the Plan, the Committee shall have authority, in its sole discretion, to determine which employees shall receive an Award, the time or times when such Award shall be made, whether an Incentive Stock Option or nonqualified Option shall be granted, and the number of shares to be subject to each Option or Restricted Stock Award, the number of shares subject to or the value of each Performance Award, and the value of each Phantom Stock Award. In making such determinations, the Committee shall take into account the nature of the services rendered by the respective employees, their present and potential contribution to the Company's success and such other factors as the Committee in its sole discretion shall deem relevant. -3- 4 (c) ADDITIONAL POWERS. The Committee shall have such additional powers as are delegated to it by the other provisions of the Plan. Subject to the express provisions of the Plan, this shall include the power to construe the Plan and the respective agreements executed hereunder, to prescribe rules and regulations relating to the Plan, and to determine the terms, restrictions and provisions of the agreement relating to each Award, including such terms, restrictions and provisions as shall be requisite in the judgment of the Committee to cause designated Options to qualify as Incentive Stock Options, and to make all other determinations necessary or advisable for administering the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any agreement relating to an Award in the manner and to the extent it shall deem expedient to carry it into effect. The determinations of the Committee on the matters referred to in this Paragraph IV shall be conclusive. V. SHARES SUBJECT TO THE PLAN; GRANT OF OPTIONS; GRANT OF RESTRICTED STOCK AWARDS (a) SHARES SUBJECT TO THE PLAN AND AWARD LIMITS. Subject to adjustment in the same manner as provided in Paragraph XI with respect to shares of Common Stock subject to Options then outstanding, the aggregate number of shares of Common Stock that may be issued under the Plan shall not exceed 5,000,000 shares. Shares shall be deemed to have been issued under the Plan only to the extent actually issued and delivered pursuant to an Award. To the extent that an Award lapses or the rights of its Holder terminate, any shares of Common Stock subject to such Award shall again be available for the grant of an Award under the Plan. Notwithstanding any provision in the Plan to the contrary, the maximum number of shares of Common Stock that may be subject to Options, Restricted Stock Awards and Performance Awards denominated in shares of Common Stock granted to any one individual during any calendar year may not exceed 1,000,000 shares of Common Stock (subject to adjustment in the same manner as provided in Paragraph XI with respect to shares of Common Stock subject to Options then outstanding) and the maximum value of any Performance Award denominated in cash (including the Fair Market Value of any shares of Common Stock paid in satisfaction of such Performance Award) granted to any one individual during any calendar year may not exceed $3,000,000. The limitations set forth in the preceding sentence shall be applied in a manner which will permit compensation generated under the Plan to constitute "performance-based" compensation for purposes of section 162(m) of the Code, including, without limitation, counting against such maximum number of shares, to the extent required under section 162(m) of the Code and applicable interpretive authority thereunder, any shares subject to Options that are canceled or repriced. (b) GRANT OF AWARDS. The Committee may from time to time grant Awards to one or more employees determined by it to be eligible for participation in the Plan in accordance with the terms of the Plan. (c) STOCK OFFERED. Subject to the limitations set forth in Paragraph V(a), the stock to be offered pursuant to the grant of an Award may be authorized but unissued Common Stock or -4- 5 Common Stock previously issued and outstanding and reacquired by the Company. Any of such shares which remain unissued and which are not subject to outstanding Awards at the termination of the Plan shall cease to be subject to the Plan but, until termination of the Plan, the Company shall at all times make available a sufficient number of shares to meet the requirements of the Plan. VI. ELIGIBILITY Awards may be granted only to persons who, at the time of grant, are employees. An Award may be granted on more than one occasion to the same person, and, subject to the limitations set forth in the Plan, such Award may include an Incentive Stock Option, an Option that is not an Incentive Stock Option, a Restricted Stock Award, a Performance Award, a Phantom Stock Award, or any combination thereof. VII. STOCK OPTIONS (a) OPTION PERIOD. The term of each Option shall be as specified by the Committee at the date of grant. (b) LIMITATIONS ON EXERCISE OF OPTION. An Option shall be exercisable in whole or in such installments and at such times as determined by the Committee. (c) SPECIAL LIMITATIONS ON INCENTIVE STOCK OPTIONS. An Incentive Stock Option may be granted only to an individual who is employed by the Company or any parent or subsidiary corporation (as defined in section 424 of the Code) at the time the Option is granted. To the extent that the aggregate Fair Market Value (determined at the time the respective Incentive Stock Option is granted) of Common Stock with respect to which Incentive Stock Options granted after 1986 are exercisable for the first time by an individual during any calendar year under all incentive stock option plans of the Company and its parent and subsidiary corporations exceeds $100,000, such Incentive Stock Options shall be treated as Options which do not constitute Incentive Stock Options. The Committee shall determine, in accordance with applicable provisions of the Code, Treasury Regulations and other administrative pronouncements, which of a Holder's Incentive Stock Options will not constitute Incentive Stock Options because of such limitation and shall notify the Holder of such determination as soon as practicable after such determination. No Incentive Stock Option shall be granted to an individual if, at the time the Option is granted, such individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent or subsidiary corporation, within the meaning of section 422(b)(6) of the Code, unless (i) at the time such Option is granted the option price is at least 110% of the Fair Market Value of the Common Stock subject to the Option and (ii) such Option by its terms is not exercisable after the expiration of five years from the date of grant. An Incentive Stock Option shall not be transferable otherwise than by will or the laws of descent and distribution, and shall be exercisable during the Holder's lifetime only by such Holder or the Holder's guardian or legal representative. (d) OPTION AGREEMENT. Each Option shall be evidenced by an Option Agreement in such form and containing such provisions not inconsistent with the provisions of the Plan as the Committee from time to time shall approve, including, without limitation, provisions to qualify an -5- 6 Incentive Stock Option under section 422 of the Code. Each Option Agreement shall specify the effect of termination of employment on the exercisability of the Option. An Option Agreement may provide for the payment of the option price, in whole or in part, by the delivery of a number of shares of Common Stock (plus cash if necessary) having a Fair Market Value equal to such option price. Moreover, an Option Agreement may provide for a "cashless exercise" of the Option by establishing procedures satisfactory to the Committee with respect thereto. Further, an Option Agreement may provide for the surrender of the right to purchase shares under the Option in return for a payment in cash or shares of Common Stock or a combination of cash and shares of Common Stock equal in value to the excess of the Fair Market Value of the shares with respect to which the right to purchase is surrendered over the option price therefor ("Stock Appreciation Rights"), on such terms and conditions as the Committee in its sole discretion may prescribe. In the case of any such Stock Appreciation Right that is granted in connection with an Incentive Stock Option, such right shall be exercisable only when the Fair Market Value of the Common Stock exceeds the price specified therefor in the Option or the portion thereof to be surrendered. The terms and conditions of the respective Option Agreements need not be identical. (e) OPTION PRICE AND PAYMENT. The price at which a share of Common Stock may be purchased upon exercise of an Option shall be determined by the Committee but, subject to adjustment as provided in Paragraph XI shall not be less than the Fair Market Value of a share of Common Stock on the date such Option is granted. The Option or portion thereof may be exercised by delivery of an irrevocable notice of exercise to the Company, as specified by the Committee. The purchase price of the Option or portion thereof shall be paid in full in the manner prescribed by the Committee. Separate stock certificates shall be issued by the Company for those shares acquired pursuant to the exercise of an Incentive Stock Option and for those shares acquired pursuant to the exercise of any Option that does not constitute an Incentive Stock Option. (f) STOCKHOLDER RIGHTS AND PRIVILEGES. The Holder shall be entitled to all the privileges and rights of a stockholder only with respect to such shares of Common Stock as have been purchased under the Option and for which certificates of stock have been registered in the Holder's name. (g) OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER CORPORATIONS. Options and Stock Appreciation Rights may be granted under the Plan from time to time in substitution for stock options held by individuals employed by corporations who become employees as a result of a merger or consolidation or other business combination of the employing corporation with the Company or any Affiliate. VIII. RESTRICTED STOCK AWARDS (a) FORFEITURE RESTRICTIONS TO BE ESTABLISHED BY THE COMMITTEE. Shares of Common Stock that are the subject of a Restricted Stock Award shall be subject to restrictions on disposition by the Holder and an obligation of the Holder to forfeit and surrender the shares to the Company under certain circumstances (the "Forfeiture Restrictions"). The Forfeiture Restrictions shall be determined by the Committee in its sole discretion, and the Committee may provide that the Forfeiture Restrictions shall lapse upon (i) the attainment of one or more performance measures -6- 7 established by the Committee that are based on (1) the price of a share of Common Stock, (2) the Company's earnings per share, (3) the Company's market share, (4) the market share of a business unit of the Company designated by the Committee, (5) the Company's sales, (6) the sales of a business unit of the Company designated by the Committee, (7) the net income (before or after taxes) of the Company or any business unit of the Company designated by the Committee, (8) the cash flow return on investment of the Company or any business unit of the Company designated by the Committee, (9) the earnings before or after interest, taxes, depreciation, and/or amortization of the Company or any business unit of the Company designated by the Committee, (10) the economic value added, (11) the return on stockholders' equity achieved by the Company, or (12) the total stockholders' return achieved by the Company, (ii) the Holder's continued employment with the Company for a specified period of time, (iii) the occurrence of any event or the satisfaction of any other condition specified by the Committee in its sole discretion, or (iv) a combination of any of the foregoing. The performance measures may be subject to adjustment for specified significant extraordinary items or events, and may be absolute, relative to one or more other companies, or relative to one or more indexes, and may be contingent upon future performance of the Company or any Affiliate, division, or department thereof by or in which the Holder is employed during the performance period. Each Restricted Stock Award may have different Forfeiture Restrictions, in the sole discretion of the Committee. (b) OTHER TERMS AND CONDITIONS. Common Stock awarded pursuant to a Restricted Stock Award shall be represented by a stock certificate registered in the name of the Holder of such Restricted Stock Award. The Holder shall have the right to receive dividends with respect to Common Stock subject to a Restricted Stock Award, to vote Common Stock subject thereto and to enjoy all other stockholder rights, except that (i) the Holder shall not be entitled to delivery of the stock certificate until the Forfeiture Restrictions have expired, (ii) the Company shall retain custody of the stock until the Forfeiture Restrictions have expired, (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the stock until the Forfeiture Restrictions have expired, and (iv) a breach of the terms and conditions established by the Committee pursuant to the Restricted Stock Agreement shall cause a forfeiture of the Restricted Stock Award. At the time of such Award, the Committee may, in its sole discretion, prescribe additional terms, conditions or restrictions relating to Restricted Stock Awards, including, but not limited to, rules pertaining to the termination of employment (by retirement, disability, death or otherwise) of a Holder prior to expiration of the Forfeitures Restrictions. Such additional terms, conditions or restrictions shall be set forth in a Restricted Stock Agreement made in conjunction with the Award. (c) PAYMENT FOR RESTRICTED STOCK. The Committee shall determine the amount and form of any payment for Common Stock received pursuant to a Restricted Stock Award, provided that in the absence of such a determination, a Holder shall not be required to make any payment for Common Stock received pursuant to a Restricted Stock Award, except to the extent otherwise required by law. (d) COMMITTEE'S DISCRETION TO ACCELERATE VESTING OF RESTRICTED STOCK AWARDS. The Committee may, in its discretion and as of a date determined by the Committee, fully vest any or all Common Stock awarded to a Holder pursuant to a Restricted Stock Award and, upon such vesting, all restrictions applicable to such Restricted Stock Award shall terminate as of such date. Any action -7- 8 by the Committee pursuant to this Subparagraph may vary among individual Holders and may vary among the Restricted Stock Awards held by any individual Holder. Notwithstanding the preceding provisions of this Subparagraph, the Committee may not take any action described in this Subparagraph with respect to a Restricted Stock Award that has been granted to a "covered employee" (within the meaning of Treasury Regulation section 1.162-27(c)(2)) if such Award has been designed to meet the exception for performance-based compensation under section 162(m) of the Code. (e) RESTRICTED STOCK AGREEMENTS. At the time any Award is made under this Paragraph VIII, the Company and the Holder shall enter into a Restricted Stock Agreement setting forth each of the matters contemplated hereby and such other matters as the Committee may determine to be appropriate. The terms and provisions of the respective Restricted Stock Agreements need not be identical. IX. PERFORMANCE AWARDS (a) PERFORMANCE PERIOD. The Committee shall establish, with respect to and at the time of each Performance Award, the number of shares of Common Stock subject to, or the maximum value of, the Performance Award and the performance period over which the performance applicable to the Performance Award shall be measured. (b) PERFORMANCE MEASURES. A Performance Award shall be awarded to a Holder contingent upon future performance of the Company or any Affiliate, division, or department thereof by or in which such Holder is employed during the performance period. The Committee shall establish the performance measures applicable to such performance either (I) prior to the beginning of the performance period or (II) within ninety days after the beginning of the performance period if the outcome of the performance targets is substantially uncertain at the time such targets are established, but not later than the date that 25% of the performance period has elapsed; provided such measures may be made subject to adjustment for specified significant extraordinary items or events. The performance measures may be absolute, relative to one or more other companies, or relative to one or more indexes. The performance measures established by the Committee may be based upon (i) the price of a share of Common Stock, (ii) the Company's earnings per share, (iii) the Company's market share, (iv) the market share of a business unit of the Company designated by the Committee, (v) the Company's sales, (vi) the sales of a business unit of the Company designated by the Committee, (vii) the net income (before or after taxes) of the Company or any business unit of the Company designated by the Committee, (viii) the cash flow return on investment of the Company or any business unit of the Company designated by the Committee, (ix) the earnings before or after interest, taxes, depreciation, and/or amortization of the Company or any business unit of the Company designated by the Committee, (x) the economic value added, (xi) the return on stockholders' equity achieved by the Company, (xii) the total stockholders' return achieved by the Company, or (xiii) a combination of any of the foregoing. The Committee, in its sole discretion, may provide for an adjustable Performance Award value based upon the level of achievement of performance measures. -8- 9 (c) AWARDS CRITERIA. In determining the value of Performance Awards, the Committee shall take into account a Holder's responsibility level, performance, potential, other Awards, and such other considerations as it deems appropriate. The Committee, in its sole discretion, may provide for a reduction in the value of a Holder's Performance Award during the performance period. (d) PAYMENT. Following the end of the performance period, the Holder of a Performance Award shall be entitled to receive payment of an amount not exceeding the number of shares of Common Stock subject to or the maximum value of the Performance Award, based on the achievement of the performance measures for such performance period, as determined by the Committee. Payment of a Performance Award may be made in cash, Common Stock, or a combination thereof, as determined by the Committee. Payment shall be made in a lump sum or in installments as prescribed by the Committee. If a Performance Award covering shares of Common Stock is to be paid in cash, such payment shall be based on the Fair Market Value of the Common Stock on the payment date. (e) TERMINATION OF AWARD. A Performance Award shall terminate if the Holder does not remain continuously in the employ of the Company and its Affiliates at all times during the applicable performance period, except as may be determined by the Committee. (f) PERFORMANCE AWARD AGREEMENTS. At the time any Award is made under this Paragraph IX, the Company and the Holder shall enter into a Performance Award Agreement setting forth each of the matters contemplated hereby, and such additional matters as the Committee may determine to be appropriate. The terms and provisions of the respective Performance Award Agreements need not be identical. X. PHANTOM STOCK AWARDS (a) PHANTOM STOCK AWARDS. Phantom Stock Awards are rights to receive shares of Common Stock (or the Fair Market Value thereof), or rights to receive an amount equal to any appreciation or increase in the Fair Market Value of Common Stock over a specified period of time, which vest over a period of time as established by the Committee, without satisfaction of any performance criteria or objectives. The Committee may, in its discretion, require payment or other conditions of the Holder respecting any Phantom Stock Award. (b) AWARD PERIOD. The Committee shall establish, with respect to and at the time of each Phantom Stock Award, a period over which the Award shall vest with respect to the Holder. (c) AWARDS CRITERIA. In determining the value of Phantom Stock Awards, the Committee shall take into account a Holder's responsibility level, performance, potential, other Awards, and such other considerations as it deems appropriate. (d) PAYMENT. Following the end of the vesting period for a Phantom Stock Award (or at such other time as the applicable Phantom Stock Award Agreement may provide), the Holder of a Phantom Stock Award shall be entitled to receive payment of an amount, not exceeding the -9- 10 maximum value of the Phantom Stock Award, based on the then vested value of the Award. Payment of a Phantom Stock Award may be made in cash, Common Stock, or a combination thereof as determined by the Committee. Payment shall be made in a lump sum or in installments as prescribed by the Committee. Any payment to be made in cash shall be based on the Fair Market Value of the Common Stock on the payment date. Cash dividend equivalents may be paid during or after the vesting period with respect to a Phantom Stock Award, as determined by the Committee. (e) TERMINATION OF AWARD. A Phantom Stock Award shall terminate if the Holder does not remain continuously in the employ of the Company and its Affiliates at all times during the applicable vesting period, except as may be otherwise determined by the Committee. (f) PHANTOM STOCK AWARD AGREEMENTS. At the time any Award is made under this Paragraph X, the Company and the Holder shall enter into a Phantom Stock Award Agreement setting forth each of the matters contemplated hereby, and such additional matters as the Committee may determine to be appropriate. The terms and provisions of the respective Phantom Stock Award Agreements need not be identical. XI. RECAPITALIZATION OR REORGANIZATION (a) NO EFFECT ON RIGHT OR POWER. The existence of the Plan and the Awards granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's or any Affiliate's capital structure or its business, any merger or consolidation of the Company or any Affiliate, any issue of debt or equity securities ahead of or affecting Common Stock or the rights thereof, the dissolution or liquidation of the Company or any Affiliate or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding. (b) SUBDIVISION OR CONSOLIDATION OF SHARES; STOCK DIVIDENDS. The shares with respect to which Awards may be granted are shares of Common Stock as presently constituted, but if, and whenever, prior to the expiration of an Award theretofore granted, the Company shall effect a subdivision or consolidation of shares of Common Stock or the payment of a stock dividend on Common Stock without receipt of consideration by the Company, the number of shares of Common Stock with respect to which such Award may thereafter be exercised or satisfied, as applicable (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and the purchase price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and the purchase price per share shall be proportionately increased. Any factional share resulting from such adjustment shall be rounded down to the next whole share. (c) RECAPITALIZATIONS AND CORPORATE CHANGES. If the Company recapitalizes, reclassifies its capital stock, or otherwise changes its capital structure (a "recapitalization"), the number and class of shares of Common Stock covered by an Award theretofore granted shall be adjusted so that such Award shall thereafter cover the number and class of shares of stock and -10- 11 securities to which the Holder would have been entitled pursuant to the terms of the recapitalization if, immediately prior to the recapitalization, the Holder had been the holder of record of the number of shares of Common Stock then covered by such Award. If (i) the Company shall not be the surviving entity in any merger or consolidation (or survives only as a subsidiary of an entity), (ii) the Company sells, leases or exchanges or agrees to sell, lease or exchange all or substantially all of its assets to any other person or entity, (iii) the Company is to be dissolved and liquidated, (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the 1934 Act, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company's voting stock (based upon voting power), or (v) as a result of or in connection with a contested election of Directors, the persons who were Directors of the Company before such election shall cease to constitute a majority of the Board (each such event is referred to herein as a "Corporate Change"), no later than (x) ten days after the approval by the stockholders of the Company of such merger, consolidation, reorganization, sale, lease or exchange of assets or dissolution or such election of Directors or (y) thirty days after a Corporate Change of the type described in clause (iv), the Committee, acting in its sole discretion without the consent or approval of any Holder, shall effect one or more of the following alternatives, which alternatives may vary among individual Holders and which may vary among Options held by any individual Holder: (1) accelerate the time at which Options then outstanding may be exercised so that such Options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change) fixed by the Committee, after which specified date all unexercised Options and all rights of Holders thereunder shall terminate, (2) require the mandatory surrender to the Company by selected Holders of some or all of the outstanding Options held by such Holders (irrespective of whether such Options are then exercisable under the provisions of the Plan) as of a date, before or after such Corporate Change, specified by the Committee, in which event the Committee shall thereupon cancel such Options and the Company shall pay (or cause to be paid) to each Holder an amount of cash per share equal to the excess, if any, of the amount calculated in Subparagraph (d) below (the "Change of Control Value") of the shares subject to such Option over the exercise price(s) under such Options for such shares, (3) make such adjustments to Options then outstanding as the Committee deems appropriate to reflect such Corporate Change (provided, however, that the Committee may determine in its sole discretion that no adjustment is necessary to Options then outstanding), or (4) provide that the number and class of shares of Common Stock covered by an Option theretofore granted shall be adjusted so that such Option shall thereafter cover the number and class of shares of stock or other securities or property (including, without limitation, cash) to which the Holder would have been entitled pursuant to the terms of the agreement of merger, consolidation or sale of assets and dissolution if, immediately prior to such merger, consolidation or sale of assets and dissolution, the Holder had been the holder of record of the number of shares of Common Stock then covered by such Option. (d) CHANGE OF CONTROL VALUE. For the purposes of clause (2) in Subparagraph (c) above, the "Change of Control Value" shall equal the amount determined in clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the per share price offered to stockholders of the Company in any such merger, consolidation, sale of assets or dissolution transaction, (ii) the price per share offered to stockholders of the Company in any tender offer or exchange offer whereby a Corporate Change takes place, or (iii) if such Corporate Change occurs other than pursuant to a tender or exchange offer, the Fair Market Value per share of the shares into which such Options being -11- 12 surrendered are exercisable, as determined by the Committee as of the date determined by the Committee to be the date of cancellation and surrender of such Options. In the event that the consideration offered to stockholders of the Company in any transaction described in this Subparagraph (d) or Subparagraph (c) above consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash. (e) OTHER CHANGES IN THE COMMON STOCK. In the event of changes in the outstanding Common Stock by reason of recapitalizations, reorganizations, mergers, consolidations, combinations, split-ups, split-offs, spin-offs, exchanges or other relevant changes in capitalization or distributions to the holders of Common Stock occurring after the date of the grant of any Award and not otherwise provided for by this Paragraph XI, such Award and any agreement evidencing such Award shall be subject to adjustment by the Committee at its sole discretion as to the number and price of shares of Common Stock or other consideration subject to such Award. In the event of any such change in the outstanding Common Stock or distribution to the holders of Common Stock, the aggregate number of shares available under the Plan and the maximum number of shares that may be subject to Awards granted to any one individual may be appropriately adjusted by the Committee, whose determination shall be conclusive. Notwithstanding the foregoing, upon the occurrence of a Corporate Change, the Committee, acting in its sole discretion without the consent or approval of any Holder, may require the mandatory surrender to the Company by selected Holders of some or all of the outstanding Performance Awards and Phantom Stock Awards as of a date, before or after such Corporate Change, specified by the Committee, in which event the Committee shall thereupon cancel such Performance Awards and Phantom Stock Awards and the Company shall pay (or cause to be paid) to each Holder an amount of cash equal to the maximum value of such Performance Award or Phantom Stock Award which, in the event the applicable performance or vesting period set forth in such Performance Award or Phantom Stock Award has not been completed, shall be multiplied by a fraction, the numerator of which is the number of days during the period beginning on the first day of the applicable performance or vesting period and ending on the date of the surrender, and the denominator of which is the aggregate number of days in the applicable performance or vesting period. (f) STOCKHOLDER ACTION. Any adjustment provided for in the above Subparagraphs shall be subject to any required stockholder action. (g) NO ADJUSTMENTS UNLESS OTHERWISE PROVIDED. Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Common Stock subject to Awards theretofore granted or the purchase price per share, if applicable. -12- 13 XII. AMENDMENT AND TERMINATION OF THE PLAN The Board in its discretion may terminate the Plan at any time with respect to any shares of Common Stock for which Awards have not theretofore been granted. The Board shall have the right to alter or amend the Plan or any part thereof from time to time; provided that no change in any Award theretofore granted may be made which would impair the rights of the Holder without the consent of the Holder, and provided, further, that the Board may not, without approval of the stockholders, amend the Plan to (a) increase the maximum aggregate number of shares that may be issued under the Plan or (b) change the class of individuals eligible to receive Awards under the Plan. XIII. MISCELLANEOUS (a) NO RIGHT TO AN AWARD. Neither the adoption of the Plan nor any action of the Board or of the Committee shall be deemed to give an employee any right to be granted an Option, a right to a Restricted Stock Award, a right to a Performance Award or a right to a Phantom Stock Award, or any other rights hereunder except as may be evidenced by an Award agreement duly executed on behalf of the Company, and then only to the extent and on the terms and conditions expressly set forth therein. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of funds or assets to assure the performance of its obligations under any Award. (b) NO EMPLOYMENT RIGHTS CONFERRED. Nothing contained in the Plan shall (i) confer upon any employee any right with respect to continuation of employment with the Company or any Affiliate or (ii) interfere in any way with the right of the Company or any Affiliate to terminate his or her employment relationship at any time. (c) OTHER LAWS; WITHHOLDING. The Company shall not be obligated to issue any Common Stock pursuant to any Award granted under the Plan at any time when the shares covered by such Award have not been registered under the Securities Act of 1933, as amended, and such other state and federal laws, rules and regulations as the Company or the Committee deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules and regulations available for the issuance and sale of such shares. No fractional shares of Common Stock shall be delivered, nor shall any cash in lieu of fractional shares be paid. The Company shall have the right to deduct in connection with all Awards any taxes required by law to be withheld and to require any payments required to enable it to satisfy its withholding obligations. (d) NO RESTRICTION ON CORPORATE ACTION. Nothing contained in the Plan shall be construed to prevent the Company or any Affiliate from taking any action which is deemed by the Company or such Affiliate to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Award made under the Plan. No employee, beneficiary or other person shall have any claim against the Company or any Affiliate as a result of any such action. -13- 14 (e) RESTRICTIONS ON TRANSFER. An Award (other than an Incentive Stock Option, which shall be subject to the transfer restrictions set forth in Paragraph VII(c)) shall not be transferable otherwise than (i) by will or the laws of descent and distribution, (ii) pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder, or (iii) with the consent of the Committee. (f) GOVERNING LAW. THE PLAN SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE. -14- EX-10.7 4 2000 LONG TERM INCENTIVE PLAN 1 EXHIBIT 10.7 DYNEGY INC. 2000 LONG TERM INCENTIVE PLAN I. PURPOSE The purpose of the DYNEGY INC. 2000 LONG TERM INCENTIVE PLAN (the "Plan") is to provide a means through which Energy Convergence Holding Company (to be renamed Dynegy Inc.), an Illinois corporation (the "Company"), and its subsidiaries may attract able persons to enter the employ of the Company and its affiliates and to provide a means whereby those individuals upon whom the responsibilities of the successful administration and management of the Company and its affiliates rest, and whose present and potential contributions to the welfare of the Company and its affiliates are of importance, can acquire and maintain stock ownership, thereby strengthening their concern for the welfare of the Company and its affiliates. A further purpose of the Plan is to provide such individuals with additional incentive and reward opportunities designed to enhance the profitable growth of the Company and its affiliates. Accordingly, the Plan provides for granting Incentive Stock Options, options that do not constitute Incentive Stock Options, Restricted Stock Awards, Performance Awards, and Phantom Stock Awards, or any combination of the foregoing, as is best suited to the circumstances of the particular employee as provided herein. II. DEFINITIONS The following definitions shall be applicable throughout the Plan unless specifically modified by any paragraph: "Affiliate" means any corporation, partnership, limited liability company or partnership, association, trust or other organization which, directly or indirectly, controls, is controlled by, or is under common control with, the Company. For purposes of the preceding sentence, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any entity or organization, shall mean the possession, directly or indirectly, of the power (i) to vote more than 50% of the securities having ordinary voting power for the election of directors of the controlled entity or organization, or (ii) to direct or cause the direction of the management and policies of the controlled entity or organization, whether through the ownership of voting securities or by contract or otherwise. "Award" means, individually or collectively, any Option, Restricted Stock Award, Performance Award or Phantom Stock Award. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended. Reference in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section. "Committee" means a committee of the Board that is selected by the Board as provided in Paragraph IV(a). "Common Stock" means the Class A common stock, no par value per share, of the Company, or any security into which such common stock may be changed by reason of any transaction or event of the type described in Paragraph XI. "Company" means Energy Convergence Holding Company, an Illinois corporation. VI-1 2 "Director" means an individual elected to the Board by the stockholders of the Company or by the Board under applicable corporate law who is serving on the Board on the date the Plan is adopted by the Board or is elected to the Board after such date. An "employee" means any person (including a Director) in an employment relationship with the Company or any Affiliate. "Fair Market Value" means, as of any specified date, the closing sales price of the Common Stock reported on the stock exchange composite tape on that date, or, if no prices are reported on that date, on the last preceding date on which such prices of the Common Stock are so reported. In the event Common Stock is not publicly traded at the time a determination of its value is required to be made hereunder, the determination of its fair market value shall be made by the Committee in such manner as it deems appropriate. "Holder" means an employee who has been granted an Award. "Incentive Stock Option" means an incentive stock option within the meaning of section 422 of the Code. "Non-Employee Director" means a Director who is not employed by the Company or any of its subsidiaries;. "1934 Act" means the Securities Exchange Act of 1934, as amended. "Option" means an Award granted under Paragraph VII of the Plan and includes both Incentive Stock Options to purchase Common Stock and Options that do not constitute Incentive Stock Options to purchase Common Stock. "Option Agreement" means a written agreement between the Company and a Holder with respect to an Option. "Performance Award" means an Award granted under Paragraph IX of the Plan. "Performance Award Agreement" means a written agreement between the Company and a Holder with respect to a Performance Award. "Phantom Stock Award" means an Award granted under Paragraph X of the Plan. "Phantom Stock Award Agreement" means a written agreement between the Company and a Holder with respect to a Phantom Stock Award. "Plan" means the Dynegy Inc. 2000 Long Term Incentive Plan, as amended from time to time. "Restricted Stock Agreement" means a written agreement between the Company and a Holder with respect to a Restricted Stock Award. "Restricted Stock Award" means an Award granted under Paragraph VIII of the Plan. "Rule 16b-3" means SEC Rule 16b-3 promulgated under the 1934 Act, as such may be amended from time to time, and any successor rule, regulation or statute fulfilling the same or a similar function. "Stock Appreciation Right" shall have the meaning assigned to such term in Paragraph VII(d) of the Plan. III. EFFECTIVE DATE AND DURATION OF THE PLAN The Plan shall become effective upon the Effective Time under the Agreement and Plan of Merger dated June 14, 1999, among the Company, Dynegy Inc., Illinova Corporation, Dynegy Acquisition Corporation and Energy Convergence Acquisition Corporation (the "Merger Agreement"). Notwithstanding any provision in the Plan, no Option shall be exercisable and no Award shall vest or become satisfiable prior to such stockholder approval. No VI-2 3 further Awards may be granted under the Plan after ten years from the Effective Time under the Merger Agreement. The Plan shall remain in effect until all Options granted under the Plan have been exercised or expired, all Restricted Stock Awards granted under the Plan have vested or been forfeited, and all Performance Awards and Phantom Stock Awards have been satisfied or expired. IV. ADMINISTRATION (a) Composition of Committee. The Plan shall be administered by a committee of, and appointed by, the Board, and such committee shall be comprised of two or more outside Directors (within the meaning of the term "outside directors" as used in section 162(m) of the Code and applicable interpretive authority thereunder and within the meaning of "Non-Employee Director" as defined in Rule 16b-3). (b) Powers. Subject to the express provisions of the Plan, the Committee shall have authority, in its sole discretion, to determine which employees shall receive an Award, the time or times when such Award shall be made, whether an Incentive Stock Option or nonqualified Option shall be granted, and the number of shares to be subject to each Option or Restricted Stock Award, the number of shares subject to or the value of each Performance Award, and the value of each Phantom Stock Award. In making such determinations, the Committee shall take into account the nature of the services rendered by the respective employees, their present and potential contribution to the Company's success and such other factors as the Committee in its sole discretion shall deem relevant. (c) Additional Powers. The Committee shall have such additional powers as are delegated to it by the other provisions of the Plan. Subject to the express provisions of the Plan, this shall include the power to construe the Plan and the respective agreements executed hereunder, to prescribe rules and regulations relating to the Plan, and to determine the terms, restrictions and provisions of the agreement relating to each Award, including such terms, restrictions and provisions as shall be requisite in the judgment of the Committee to cause designated Options to qualify as Incentive Stock Options, and to make all other determinations necessary or advisable for administering the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any agreement relating to an Award in the manner and to the extent it shall deem expedient to carry it into effect. The determinations of the Committee on the matters referred to in this Paragraph IV shall be conclusive. V. SHARES SUBJECT TO THE PLAN; GRANT OF OPTIONS; GRANT OF RESTRICTED STOCK AWARDS (a) Shares Subject to the Plan and Award Limits. Subject to adjustment in the same manner as provided in Paragraph XI with respect to shares of Common Stock subject to Options then outstanding, the aggregate number of shares of Common Stock that may be issued under the Plan shall not exceed 5,000,000 shares. Shares shall be deemed to have been issued under the Plan only to the extent actually issued and delivered pursuant to an Award. To the extent that an Award lapses or the rights of its Holder terminate, any shares of Common Stock subject to such Award shall again be available for the grant of an Award under the Plan. Notwithstanding any provision in the Plan to the contrary, the maximum number of shares of Common Stock that may be subject to Options, Restricted Stock Awards (subject to performance forfeiture restrictions described in Paragraph VIII) and Performance Awards denominated in shares of Common Stock granted to any one individual during any calendar year may not exceed 1,000,000 shares of Common Stock (subject to adjustment in the same manner as provided in Paragraph XI with respect to shares of Common Stock subject to Options then outstanding) and the maximum value of any Performance Award denominated in cash (including the Fair Market Value of any shares of Common Stock paid in satisfaction of such Performance Award) granted to any one individual during any calendar year may not exceed $5,000,000. The limitations set forth in the preceding sentence shall be applied in a manner which will permit compensation generated under the Plan to constitute "performance-based" compensation for purposes of section 162(m) of the Code, including, without limitation, counting against such maximum number of shares, to the extent required under section 162(m) of the Code and applicable interpretive authority thereunder, any shares subject to Options that are canceled or repriced. VI-3 4 (b) Grant of Awards. The Committee may from time to time grant Awards to one or more employees determined by it to be eligible for participation in the Plan in accordance with the terms of the Plan. (c) Stock Offered. Subject to the limitations set forth in Paragraph V(a),the stock to be offered pursuant to the grant of an Award may be authorized but unissued Common Stock or Common Stock previously issued and outstanding and reacquired by the Company. Any of such shares which remain unissued and which are not subject to outstanding Awards at the termination of the Plan shall cease to be subject to the Plan but, until termination of the Plan, the Company shall at all times make available a sufficient number of shares to meet the requirements of the Plan. VI. ELIGIBILITY Awards may be granted only to persons who, at the time of grant, are employees of the Company and its Affiliates, or Non-Employee Directors. An Award may be granted on more than one occasion to the same person, and, subject to the limitations set forth in the Plan, such Award may include an Incentive Stock Option, an Option that is not an Incentive Stock Option, a Restricted Stock Award, a Performance Award, a Phantom Stock Award, or any combination thereof. VII. STOCK OPTIONS (a) Option Period. The term of each Option shall be as specified by the Committee at the date of grant. (b) Limitations on Exercise of Option. An Option shall be exercisable in whole or in such installments and at such times as determined by the Committee. (c) Special Limitations on Incentive Stock Options. An Incentive Stock Option may be granted only to an individual who is employed by the Company or any parent or subsidiary corporation (as defined in section 424 of the Code) at the time the Option is granted. To the extent that the aggregate Fair Market Value (determined at the time the respective Incentive Stock Option is granted) of Common Stock with respect to which Incentive Stock Options granted after 1986 are exercisable for the first time by an individual during any calendar year under all incentive stock option plans of the Company and its parent and subsidiary corporations exceeds $100,000, such Incentive Stock Options shall be treated as Options which do not constitute Incentive Stock Options. The Committee shall determine, in accordance with applicable provisions of the Code, Treasury Regulations and other administrative pronouncements, which of a Holder's Incentive Stock Options will not constitute Incentive Stock Options because of such limitation and shall notify the Holder of such determination as soon as practicable after such determination. No Incentive Stock Option shall be granted to an individual if, at the time the Option is granted, such individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent or subsidiary corporation, within the meaning of section 422(b)(6) of the Code, unless (i) at the time such Option is granted the option price is at least 110% of the Fair Market Value of the Common Stock subject to the Option and (ii) such Option by its terms is not exercisable after the expiration of five years from the date of grant. An Incentive Stock Option shall not be transferable otherwise than by will or the laws of descent and distribution, and shall be exercisable during the Holder's lifetime only by such Holder or the Holder's guardian or legal representative. (d) Option Agreement. Each Option shall be evidenced by an Option Agreement in such form and containing such provisions not inconsistent with the provisions of the Plan as the Committee from time to time shall approve, including, without limitation, provisions to qualify an Incentive Stock Option under section 422 of the Code. Each Option Agreement shall specify the effect of termination of employment on the exercisability of the Option. An Option Agreement may provide for the payment of the option price, in whole or in part, by the delivery of a number of shares of Common Stock (plus cash if necessary) having a Fair Market Value equal to such option price. Moreover, an Option Agreement may provide for a "cashless exercise" of the Option by establishing procedures satisfactory to the Committee with respect thereto. Further, an Option Agreement may provide for the surrender of VI-4 5 the right to purchase shares under the Option in return for a payment in cash or shares of Common Stock or a combination of cash and shares of Common Stock equal in value to the excess of the Fair Market Value of the shares with respect to which the right to purchase is surrendered over the option price therefor ("Stock Appreciation Rights"), on such terms and conditions as the Committee in its sole discretion may prescribe. In the case of any such Stock Appreciation Right that is granted in connection with an Incentive Stock Option, such right shall be exercisable only when the Fair Market Value of the Common Stock exceeds the price specified therefor in the Option or the portion thereof to be surrendered. The terms and conditions of the respective Option Agreements need not be identical. (e) Option Price and Payment. The price at which a share of Common Stock may be purchased upon exercise of an Option shall be determined by the Committee but, in the case of Incentive Stock Options only, subject to adjustment as provided in Paragraph XI shall not be less than the Fair Market Value of a share of Common Stock on the date such Incentive Stock Option is granted. The Option or portion thereof may be exercised by delivery of an irrevocable notice of exercise to the Company, as specified by the Committee. The purchase price of the Option or portion thereof shall be paid in full in the manner prescribed by the Committee. Separate stock certificates shall be issued by the Company for those shares acquired pursuant to the exercise of an Incentive Stock Option and for those shares acquired pursuant to the exercise of any Option that does not constitute an Incentive Stock Option. (f) Stockholder Rights and Privileges. The Holder shall be entitled to all the privileges and rights of a stockholder only with respect to such shares of Common Stock as have been purchased under the Option and for which certificates of stock have been registered in the Holder's name. (g) Options and Rights in Substitution for Stock Options Granted by Other Corporations. Options and Stock Appreciation Rights may be granted under the Plan from time to time in substitution for stock options held by individuals employed by corporations who become employees as a result of a merger or consolidation or other business combination of the employing corporation with the Company or any Affiliate. (h) Non-Employee Director Option Grants. Upon his or her election or appointment as a Director, each Non-Employee Director shall receive, without any further action on the part of the Committee, the award of an Option to purchase 3,000 shares of Common Stock, which Option shall (i) be priced at Fair Market Value, (ii) vest and become exercisable on the first anniversary of the date of grant, and (iii) with respect to any unexercised portion thereof, automatically and without further notice, terminate and become null and void on the tenth anniversary of the date of grant of such Option or on the third anniversary of the date such Director's service on the Board terminates. Each Option shall be evidenced by an Option Agreement. In the event a Director is unable to, or chooses not to, accept the Award, he or she should decline to execute the Option Agreement. VIII. RESTRICTED STOCK AWARDS (a) Forfeiture Restrictions To Be Established by the Committee. Shares of Common Stock that are the subject of a Restricted Stock Award shall be subject to restrictions on disposition by the Holder and an obligation of the Holder to forfeit and surrender the shares to the Company under certain circumstances(the "Forfeiture Restrictions"). The Forfeiture Restrictions shall be determined by the Committee in its sole discretion, and the Committee may provide that the Forfeiture Restrictions shall lapse upon (i) the attainment of one or more performance measures established by the Committee that are based on: (1) the price of a share of Common Stock, (2) the Company's earnings per share, (3) the Company's market share, (4) the market share of a business unit of the Company designated by the Committee, (5) the Company's sales, (6) the sales of a business unit of the Company designated by the Committee, VI-5 6 (7) the net income (before or after taxes) of the Company or any business unit of the Company designated by the Committee, (8) the cash flow return on investment of the Company or any business unit of the Company designated by the Committee, (9) the earnings before or after interest, taxes, depreciation, and/or amortization of the Company or any business unit of the Company designated by the Committee, (10) the economic value added, (11) the return on stockholders' equity achieved by the Company, or (12) the total stockholders' return achieved by the Company, (ii) the Holder's continued employment with the Company for a specified period of time, (iii) the occurrence of any event or the satisfaction of any other condition specified by the Committee in its sole discretion, or (iv) a combination of any of the foregoing. The performance measures may be subject to adjustment for specified significant extraordinary items or events, and may be absolute, relative to one or more other companies, or relative to one or more indexes, and may be contingent upon future performance of the Company or any Affiliate, division, or department thereof by or in which the Holder is employed during the performance period. Each Restricted Stock Award may have different Forfeiture Restrictions, in the sole discretion of the Committee. (b) Other Terms and Conditions. Common Stock awarded pursuant to a Restricted Stock Award shall be represented by a stock certificate registered in the name of the Holder of such Restricted Stock Award. The Holder shall have the right to receive dividends with respect to Common Stock subject to a Restricted Stock Award, to vote Common Stock subject thereto and to enjoy all other stockholder rights, except that (i) the Holder shall not be entitled to delivery of the stock certificate until the Forfeiture Restrictions have expired, (ii) the Company shall retain custody of the stock until the Forfeiture Restrictions have expired, (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the stock until the Forfeiture Restrictions have expired, and (iv) a breach of the terms and conditions established by the Committee pursuant to the Restricted Stock Agreement shall cause a forfeiture of the Restricted Stock Award. At the time of such Award, the Committee may, in its sole discretion, prescribe additional terms, conditions or restrictions relating to Restricted Stock Awards, including, but not limited to, rules pertaining to the termination of employment (by retirement, disability, death or otherwise) of a Holder prior to expiration of the Forfeitures Restrictions. Such additional terms, conditions or restrictions shall be set forth in a Restricted Stock Agreement made in conjunction with the Award. (c) Payment for Restricted Stock. The Committee shall determine the amount and form of any payment for Common Stock received pursuant to a Restricted Stock Award, provided that in the absence of such a determination, a Holder shall not be required to make any payment for Common Stock received pursuant to a Restricted Stock Award, except to the extent otherwise required by law. (d) Committee's Discretion to Accelerate Vesting of Restricted Stock Awards. The Committee may, in its discretion and as of a date determined by the Committee, fully vest any or all Common Stock awarded to a Holder pursuant to a Restricted Stock Award and, upon such vesting, all restrictions applicable to such Restricted Stock Award shall terminate as of such date. Any action by the Committee pursuant to this Subparagraph may vary among individual Holders and may vary among the Restricted Stock Awards held by any individual Holder. Notwithstanding the preceding provisions of this Subparagraph, the Committee may not take any action described in this Subparagraph with respect to a Restricted Stock Award that has been granted to a "covered employee" (within the meaning of Treasury Regulation section 1.162-27(c)(2)) if such Award has been designed to meet the exception for performance-based compensation under section 162(m) of the Code. VI-6 7 (e) Restricted Stock Agreements. At the time any Award is made under this Paragraph VIII, the Company and the Holder shall enter into a Restricted Stock Agreement setting forth each of the matters contemplated hereby and such other matters as the Committee may determine to be appropriate. The terms and provisions of the respective Restricted Stock Agreements need not be identical. IX. PERFORMANCE AWARDS (a) Performance Period. The Committee shall establish, with respect to and at the time of each Performance Award, the number of shares of Common Stock subject to, or the maximum value of, the Performance Award and the performance period over which the performance applicable to the Performance Award shall be measured. (b) Performance Measures. A Performance Award shall be awarded to a Holder contingent upon future performance of the Company or any Affiliate, division, or department thereof by or in which such Holder is employed during the performance period. The Committee shall establish the performance measures applicable to such performance either (I) prior to the beginning of the performance period or (II) within ninety days after the beginning of the performance period if the outcome of the performance targets is substantially uncertain at the time such targets are established, but not later than the date that 25% of the performance period has elapsed; provided such measures may be made subject to adjustment for specified significant extraordinary items or events. The performance measures may be absolute, relative to one or more other companies, or relative to one or more indexes. The performance measures established by the Committee may be based upon (i) the price of a share of Common Stock, (ii) the Company's earnings per share, (iii) the Company's market share, (iv) the market share of a business unit of the Company designated by the Committee, (v) the Company's sales, (vi) the sales of a business unit of the Company designated by the Committee, (vii) the net income (before or after taxes) of the Company or any business unit of the Company designated by the Committee, (viii) the cash flow return on investment of the Company or any business unit of the Company designated by the Committee, (ix) the earnings before or after interest, taxes, depreciation, and/or amortization of the Company or any business unit of the Company designated by the Committee, (x) the economic value added, (xi) the return on stockholders' equity achieved by the Company, (xii) the total stockholders' return achieved by the Company, or (xiii) a combination of any of the foregoing. The Committee, in its sole discretion, may provide for an adjustable Performance Award value based upon the level of achievement of performance measures. (c) Awards Criteria. In determining the value of Performance Awards, the Committee shall take into account a Holder's responsibility level, performance, potential, other Awards, and such other considerations as it deems appropriate. The Committee, in its sole discretion, may provide for a reduction in the value of a Holder's Performance Award during the performance period. (d) Payment. Following the end of the performance period, the Holder of a Performance Award shall be entitled to receive payment of an amount not exceeding the number of shares of Common Stock subject to or the maximum value of the Performance Award, based on the achievement of the performance measures for such performance period, as determined by the Committee. Payment of a Performance Award may be made in cash, Common Stock, or a combination thereof, as determined by the Committee. Payment shall be made in a lump sum VI-7 8 or in installments as prescribed by the Committee. If a Performance Award covering shares of Common Stock is to be paid in cash, such payment shall be based on the Fair Market Value of the Common Stock on the payment date. (e) Termination of Award. A Performance Award shall terminate if the Holder does not remain continuously in the employ of the Company and its Affiliates at all times during the applicable performance period, except as may be determined by the Committee. (f) Performance Award Agreements. At the time any Award is made under this Paragraph IX, the Company and the Holder shall enter into a Performance Award Agreement setting forth each of the matters contemplated hereby, and such additional matters as the Committee may determine to be appropriate. The terms and provisions of the respective Performance Award Agreements need not be identical. X. PHANTOM STOCK AWARDS (a) Phantom Stock Awards. Phantom Stock Awards are rights to receive shares of Common Stock (or the Fair Market Value thereof), or rights to receive an amount equal to any appreciation or increase in the Fair Market Value of Common Stock over a specified period of time, which vest over a period of time as established by the Committee, without satisfaction of any performance criteria or objectives. The Committee may, in its discretion, require payment or other conditions of the Holder respecting any Phantom Stock Award. (b) Award Period. The Committee shall establish, with respect to and at the time of each Phantom Stock Award, a period over which the Award shall vest with respect to the Holder. (c) Awards Criteria. In determining the value of Phantom Stock Awards, the Committee shall take into account a Holder's responsibility level, performance, potential, other Awards, and such other considerations as it deems appropriate. (d) Payment. Following the end of the vesting period for a Phantom Stock Award (or at such other time as the applicable Phantom Stock Award Agreement may provide), the Holder of a Phantom Stock Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Phantom Stock Award, based on the then vested value of the Award. Payment of a Phantom Stock Award may be made in cash, Common Stock, or a combination thereof as determined by the Committee. Payment shall be made in a lump sum or in installments as prescribed by the Committee. Any payment to be made in cash shall be based on the Fair Market Value of the Common Stock on the payment date. Cash dividend equivalents may be paid during or after the vesting period with respect to a Phantom Stock Award, as determined by the Committee. (e) Termination of Award. A Phantom Stock Award shall terminate if the Holder does not remain continuously in the employ of the Company and its Affiliates at all times during the applicable vesting period, except as may be otherwise determined by the Committee. (f) Phantom Stock Award Agreements. At the time any Award is made under this Paragraph X, the Company and the Holder shall enter into a Phantom Stock Award Agreement setting forth each of the matters contemplated hereby, and such additional matters as the Committee may determine to be appropriate. The terms and provisions of the respective Phantom Stock Award Agreements need not be identical. XI. RECAPITALIZATION OR REORGANIZATION (a) No Effect on Right or Power. The existence of the Plan and the Awards granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's or any Affiliate's capital structure or its business, any merger or consolidation of the Company or any Affiliate, any issue of debt or equity securities ahead of or affecting Common Stock or the rights thereof, the dissolution or liquidation of the Company or any Affiliate or any VI-8 9 sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding. (b) Subdivision or Consolidation of Shares; Stock Dividends. The shares with respect to which Awards may be granted are shares of Common Stock as presently constituted, but if, and whenever, prior to the expiration of an Award theretofore granted, the Company shall effect a subdivision or consolidation of shares of Common Stock or the payment of a stock dividend on Common Stock without receipt of consideration by the Company, the number of shares of Common Stock with respect to which such Award may thereafter be exercised or satisfied, as applicable (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and the purchase price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and the purchase price per share shall be proportionately increased. Any factional share resulting from such adjustment shall be rounded down to the next whole share. (c) Recapitalizations and Corporate Changes. If the Company recapitalizes, reclassifies its capital stock, or otherwise changes its capital structure (a "recapitalization"), the number and class of shares of Common Stock covered by an Award theretofore granted shall be adjusted so that such Award shall thereafter cover the number and class of shares of stock and securities to which the Holder would have been entitled pursuant to the terms of there capitalization if, immediately prior to the recapitalization, the Holder had been the holder of record of the number of shares of Common Stock then covered by such Award. If (i) the Company shall not be the surviving entity in any merger or consolidation (or survives only as a subsidiary of an entity), (ii) the Company sells, leases or exchanges or agrees to sell, lease or exchange all or substantially all of its assets to any other person or entity, (iii) the Company is to be dissolved and liquidated, (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the 1934 Act, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company's voting stock (based upon voting power), or (v) as a result of or in connection with a contested election of Directors, the persons who were Directors of the Company before such election shall cease to constitute a majority of the Board (each such event is referred to herein as a "Corporate Change"), no later than (x) ten days after the approval by the stockholders of the Company of such merger, consolidation, reorganization, sale, lease or exchange of assets or dissolution or such election of Directors or (y) thirty days after a Corporate Change of the type described in clause (iv), the Committee, acting in its sole discretion without the consent or approval of any Holder, shall effect one or more of the following alternatives, which alternatives may vary among individual Holders and which may vary among Options held by any individual Holder: (1) accelerate the time at which Options then outstanding may be exercised so that such Options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change)fixed by the Committee, after which specified date all unexercised Options and all rights of Holders thereunder shall terminate, (2) require the mandatory surrender to the Company by selected Holders of some or all of the outstanding Options held by such Holders (irrespective of whether such Options are then exercisable under the provisions of the Plan) as of a date, before or after such Corporate Change, specified by the Committee, in which event the Committee shall thereupon cancel such Options and the Company shall pay (or cause to be paid) to each Holder an amount of cash per share equal to the excess, if any, of the amount calculated in Subparagraph d below (the "Change of Control Value") of the shares subject to such Option over the exercise price(s) under such Options for such shares, (3) make such adjustments to Options then outstanding as the Committee deems appropriate to reflect such Corporate Change (provided, however, that the Committee may determine in its sole discretion that no adjustment is necessary to Options then outstanding), or VI-9 10 (4) provide that the number and class of shares of Common Stock covered by an Option theretofore granted shall be adjusted so that such Option shall thereafter cover the number and class of shares of stock or other securities or property (including, without limitation, cash) to which the Holder would have been entitled pursuant to the terms of the agreement of merger, consolidation or sale of assets and dissolution if, immediately prior to such merger, consolidation or sale of assets and dissolution, the Holder had been the holder of record of the number of shares of Common Stock then covered by such Option. (d) Change of Control Value. For the purposes of clause (2) in Subparagraph(c) above, the "Change of Control Value" shall equal the amount determined in clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the per share price offered to stockholders of the Company in any such merger, consolidation, sale of assets or dissolution transaction, (ii) the price per share offered to stockholders of the Company in any tender offer or exchange offer whereby a Corporate Change takes place, or (iii) if such Corporate Change occurs other than pursuant to a tender or exchange offer, the Fair Market Value per share of the shares into which such Options being surrendered are exercisable, as determined by the Committee as of the date determined by the Committee to be the date of cancellation and surrender of such Options. In the event that the consideration offered to stockholders of the Company in any transaction described in this Subparagraph (d) or Subparagraph (c) above consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash. (e) Other Changes in the Common Stock. In the event of changes in the outstanding Common Stock by reason of recapitalizations, reorganizations, mergers, consolidations, combinations, split-ups, split-offs, spin-offs, exchanges or other relevant changes in capitalization or distributions to the holders of Common Stock occurring after the date of the grant of any Award and not otherwise provided for by this Paragraph XI, such Award and any agreement evidencing such Award shall be subject to adjustment by the Committee at its sole discretion as to the number and price of shares of Common Stock or other consideration subject to such Award. In the event of any such change in the outstanding Common Stock or distribution to the holders of Common Stock, the aggregate number of shares available under the Plan and the maximum number of shares that may be subject to Awards granted to any one individual may be appropriately adjusted by the Committee, whose determination shall be conclusive. Notwithstanding the foregoing, upon the occurrence of a Corporate Change, the Committee, acting in its sole discretion without the consent or approval of any Holder, may require the mandatory surrender to the Company by selected Holders of some or all of the outstanding Performance Awards and Phantom Stock Awards as of a date, before or after such Corporate Change, specified by the Committee, in which event the Committee shall there upon cancel such Performance Awards and Phantom Stock Awards and the Company shall pay (or cause to be paid) to each Holder an amount of cash equal to the maximum value of such Performance Award or Phantom Stock Award which, in the event the applicable performance or vesting period set forth in such Performance Award or Phantom Stock Award has not been completed, shall be multiplied by a fraction, the numerator of which is the number of days during the period beginning on the first day of the applicable performance or vesting period and ending on the date of the surrender, and the denominator of which is the aggregate number of days in the applicable performance or vesting period. (f) Stockholder Action. Any adjustment provided for in the above Subparagraphs shall be subject to any required stockholder action. (g) No Adjustments unless Otherwise Provided. Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the VI-10 11 number of shares of Common Stock subject to Awards theretofore granted or the purchase price per share, if applicable. XII. AMENDMENT AND TERMINATION OF THE PLAN The Board in its discretion may terminate the Plan at any time with respect to any shares of Common Stock for which Awards have not theretofore been granted. The Board shall have the right to alter or amend the Plan or any part thereof from time to time; provided that no change in any Award theretofore granted may be made which would impair the rights of the Holder without the consent of the Holder, and provided, further, that the Board may not, without approval of the stockholders, amend the Plan to (a) increase the maximum aggregate number of shares that may be issued under the Plan or (b) change the class of individuals eligible to receive Awards under the Plan. XIII. MISCELLANEOUS (a) No Right To An Award. Neither the adoption of the Plan nor any action of the Board or of the Committee shall be deemed to give an employee any right to be granted an Option, a right to a Restricted Stock Award, a right to a Performance Award or a right to a Phantom Stock Award, or any other rights hereunder except as may be evidenced by an Award agreement duly executed on behalf of the Company, and then only to the extent and on the terms and conditions expressly set forth therein. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of funds or assets to assure the performance of its obligations under any Award. (b) No Employment Rights Conferred. Nothing contained in the Plan shall (i)confer upon any employee any right with respect to continuation of employment with the Company or any Affiliate or (ii) interfere in any way with the right of the Company or any Affiliate to terminate his or her employment relationship at any time. (c) Other Laws; Withholding. The Company shall not be obligated to issue any Common Stock pursuant to any Award granted under the Plan at any time when the shares covered by such Award have not been registered under the Securities Act of 1933, as amended, and such other state and federal laws, rules and regulations as the Company or the Committee deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules and regulations available for the issuance and sale of such shares. No fractional shares of Common Stock shall be delivered, nor shall any cash in lieu of fractional shares be paid. The Company shall have the right to deduct in connection with all Awards any taxes required by law to be withheld and to require any payments required to enable it to satisfy its withholding obligations. (d) No Restriction on Corporate Action. Nothing contained in the Plan shall be construed to prevent the Company or any Affiliate from taking any action which is deemed by the Company or such Affiliate to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Award made under the Plan. No employee, beneficiary or other person shall have any claim against the Company or any Affiliate as a result of any such action. (e) Restrictions on Transfer. An Award (other than an Incentive Stock Option, which shall be subject to the transfer restrictions set forth in Paragraph VII(c)) shall not be transferable otherwise than (i) by will or the laws of descent and distribution, (ii) pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder, or (iii) with the consent of the Committee. (f) Governing Law. The Plan shall be construed in accordance with the laws of the State of Illinois. VI-11 EX-10.9 5 EMPLOYMENT AGREEMENT - CHARLES L. WATSON 1 EXHIBIT 10.9 EXECUTION COPY January 18, 2000 Mr. Charles L. Watson 46 Wincrest Falls Cypress, Texas 77429 Dear Chuck: Set forth below are the terms of your employment (the "Agreement") with Dynegy Inc. (hereinafter referred to as "Dynegy" or the "Company"). 1. TITLE AND DUTIES Your title will be Chairman and Chief Executive Officer of the Company. Your duties and responsibilities will be as described in the Company's Bylaws (as amended, modified or supplemented from time to time) and as delegated by the Board of Directors of the Company (the "Board of Directors") from time to time during the Term of the Agreement (as defined below), to the extent such duties and responsibilities are consistent with your duties and responsibilities as of the day preceding the Effective Date (as defined below), or as otherwise agreed by you. You will be employed at Dynegy's headquarters in Houston, Texas. You shall devote your full working time, energy and skill to the performance of your duties for Dynegy, and will exercise due diligence and reasonable care in the performance of such duties. 2. TERM (a) Unless earlier terminated as provided for herein, the term of this Agreement will be for three (3) years, commencing on the Effective Date and ending on the third anniversary of the Effective Date (such period, as extended pursuant to the next succeeding sentence, if applicable, the "Term"), The Term shall automatically be extended for additional one (1) year periods unless either the Company or you provides written notice at least sixty (60) days prior to the date on which this Agreement would otherwise be automatically extended that such party is electing not to so extend the Term. The term "Effective Date" means the date of the closing of the proposed merger of Dynegy Inc. and Illinova Corporation pursuant to that certain merger agreement dated as of June 14, 1999, as amended. 2 Mr. Charles L. Watson January 18, 2000 Page 2 (b) If your employment with Dynegy is terminated due to your voluntary resignation or by the Company for "cause" this Agreement shall terminate immediately (except for the confidentiality, non-competition and non-solicitation provisions of Paragraph 4 and the provisions of Paragraphs 5 and 6), and the Company shall have no further obligation to you except for the payment of amounts due before the date of such termination. You further agree that the benefits which you have received from the execution of this Agreement through the date of such termination constitute sufficient consideration for your obligations pursuant to Paragraph 4, notwithstanding the fact that the Company has no further obligation to you except for the payment of amounts due before the date of such termination. For purposes of this Agreement, you may be terminated for "cause" by majority vote (excluding yourself) of the Board of Directors of as a result of (i) your refusal to implement or adhere to lawful policies or lawful directives of the Board of Directors; (ii) serious misconduct, dishonesty or disloyalty, directly related to the performance of your duties for the Company or gross negligence in the performance of your duties for the Company; (iii) your being convicted (or entering into a plea bargain admitting or not contesting criminal guilt) in any criminal felony proceeding; (iv) drug or alcohol abuse; (v) continued failure to perform your duties under this Agreement, which is not cured within ten (10) days after written notice of such failure is provided to you by Dynegy; or (vi) any other material breach of this Agreement by you that is not cured within ten (10) days after written notice of such breach is delivered to you from the Company. (c) If your employment is terminated during the Term of this Agreement due to resignation following "constructive termination" (as defined below) or for any other reason other than your voluntary resignation, death, disability or discharge for cause, you shall receive as your sole compensation in lieu of further payments to you pursuant to Paragraph 3 hereof: (i) a lump sum amount equal to the product of (x) 2.99 and (y) the greater of (a) the average annual Base Salary and incentive compensation, whether payable in cash or stock options, you were required to be paid by the Company for the highest three (3) calendar years preceding the calendar year in which your employment is terminated (or such shorter period as you have actually been employed by the Company), or (b) your Base Salary and target bonus amount through the date of termination; (ii) a lump sum amount equal to the net present value, as determined by the Board of Directors in its sole and absolute discretion, of the benefits to be provided to you in Paragraphs 3(e), 3(f) and 3(g) of this Agreement and such other perquisites (if any) being provided to you on the date of your termination, as if you were still employed for the remainder of the Term of this Agreement, with regard to those benefits to be provided to you during the Term of this Agreement, and as if you had completed the Term of this Agreement with regard to those benefits to be provided to you upon completion of the Term of this Agreement; (iii) any employee stock options granted to you prior to or during the Term of this Agreement shall become vested as of the date of your resignation due to such constructive termination or discharge not for cause, and you shall have the right to exercise any such vested options through the end of the Term of this Agreement or one year from the date of termination, whichever is later; and (iv) for a period of thirty-six (36) months from the date of such termination, all health and welfare benefits the Company was maintaining for you and your family as of the date of such resignation or discharge. 3 Mr. Charles L. Watson January 18, 2000 Page 3 For purposes of this Agreement a "constructive termination" shall be deemed to have occurred in the event that: (i) your Base Salary as defined in Paragraph 3(a), bonus compensation under Paragraph 3(b), target range of annual option grants under Paragraph 3(c) or other compensation as described in Paragraphs 3(e), 3(f) and 3(g) is reduced; (ii) a significant diminution in your responsibilities, authority or scope of duties is effected by the Board of Directors, and such diminution is made without your written consent (without regard to whether or not any change is made to your title); (iii) the Company materially breaches this Agreement; (iv) the relocation of the Company's principal executive offices to a location, or the Company requires you to be based, outside a fifty (50) mile radius from the city limits of Houston, Texas; or (v) in the event any "person" other than a mutual fund that acquires the stock solely for investment purposes or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total voting stock of the Company regardless of whether any change is made to your job duties, responsibilities or compensation. A "constructive termination" shall not be deemed to have occurred in a change of control situation other than as set forth in clauses (i) through (v) above. A "constructive termination" shall not be deemed to have occurred in connection with a merger or consolidation to which the Company is a party where the surviving entity which is the ultimate parent company of the merged or consolidated entities is a public company, provided no "person" or "group" as referenced in clause (v) above owns more than 50% of the total voting stock of such surviving entity unless a "constructive termination" under clauses (i), (ii), (iii) or (iv) has occurred. For the avoidance of doubt, in order to claim the benefits payable hereunder in the event of a constructive termination, you must resign. Any resignation by you as a result of assertion of a constructive termination shall be communicated by delivery to the Board of Directors within thirty (30) days from the commencement of such constructive termination by written notice setting forth the grounds therefor, during which period the Company shall be entitled to cure or remedy the matters set forth in such notice to your reasonable satisfaction. Unless you withdraw such notice prior to the expiration of such thirty-day (30) period, such resignation shall take effect upon the expiration of thirty (30) days from the date of the delivery of such notice. Any other resignation by you shall be communicated by thirty (30) days' advance written notice. (d) If you die, or become disabled and cannot perform your duties, your employment hereunder shall be terminated immediately (except that the confidentiality, noncompetition and nonsolicitation provisions of Paragraph 4 and the provisions of Paragraphs 5 and 6 shall survive the termination of your employment) and: (i) you (or your estate) shall be entitled to the Base Salary (as defined in Paragraph 3(a)) payable to you hereunder for twelve (12) months following the month in which you die or become disabled, plus the amount of any target bonus as described in Paragraph 3(b) for the year of death or disability, prorated for the portion of the twelve-month (12) period elapsed in which the death or disability occurs; (ii) you (or your estate) shall receive, for a period of twenty-four (24) months from the date of your death or disability, all health insurance and health benefits that the Company was maintaining for you and/or your estate and for your family as of the date of your death or disability; (iii) for a period of five (5) years from the date of your death or disability, the Company shall continue to make contributions pursuant to any Split Dollar Agreements between the Company and the Watson 4 Mr. Charles L. Watson January 18, 2000 Page 4 1996 Family Trust (an irrevocable trust created on March 22, 1996, by you and Kim R. Watson, as the Grantors, and David C. Feldman, as the Trustee); (iv) any employee stock options granted to you during the Term of this Agreement shall become vested as of the date of your death or disability on the same terms as provided for the vesting of stock options in Paragraph 2(c) above; (v) and for a period of three (3) years following the date of your death or disability, the Company shall continue to maintain Directors and Officers Liability Insurance on the same terms it thereafter maintains such insurance for its directors and officers. For purposes of this Agreement, you shall be disabled as of the first date on which you become eligible to receive disability benefits under the Company's long-term disability plan (or Social Security disability benefits at a time when the Company does not maintain a long-term disability plan or such plan is not available to you). (e) Unless otherwise specified herein, all payments under this Agreement shall be paid in a lump sum, less applicable withholding taxes, within thirty (30) days following the date of your termination. 3. COMPENSATION (a) Each year during the Term hereof, you will be paid a base salary of $1,500,000 per annum ("Base Salary"), payable in accordance with the Company's payroll guidelines. Increases may be made to your Base Salary at the discretion of the Board of Directors based upon your individual performance. (b) You shall be a participant in the Company's Incentive Compensation Plan. As part of Dynegy's incentive compensation program, you will have the opportunity to earn a target bonus in an amount equal to 100% of your Base Salary and a maximum cash award in an amount equal to 200% of your Base Salary, dependent upon certain financial or performance objectives, determined in accordance with such program and by the Board of Directors. To the extent any incentive compensation in excess of the maximum cash amount referenced above is payable under the Incentive Compensation Plan in any year to you, the Company will pay you any such amounts in noncash equivalents (e.g., stock options or restricted securities of the Company) of equal value, as determined by the Board of Directors in its sole and absolute discretion. At your election, in lieu of paying you all or part of such incentive compensation bonus, the Company will allow you to direct that all or part of such incentive compensation shall be allocated by the Company to, or expended directly for, charitable contributions of your selection and/or payments of insurance premiums pursuant to any Split Dollar Agreement between the Company and the Watson 1996 Family Trust (an irrevocable trust created on March 22, 1996, by you and Kim R. Watson, as the Grantors, and David C. Feldman, as the Trustee). (c) Upon the Effective Date, you shall receive an initial grant of stock options pursuant to the Company's Long Term Incentive Plan (the "LTIP") with a projected value equal to 375% of your Base Salary. These options are subject to the vesting, forfeiture and other terms and conditions of the LTIP. Each year during the Term of this Agreement, you will be eligible to receive stock option grants granted to an employee holding the positions of "Chairman" and "Chief Executive Officer" in accordance with the requirements and provisions of the LTIP. The current target range for annual option grants for your position is a 75th percentile of 375% of 5 Mr. Charles L. Watson January 18, 2000 Page 5 your Base Salary. You recognize that any value of an award of "market" options under the LTIP is a projected value, which is subject to the future performance of the Company stock, and that there is no guarantee that the actual value of such options will achieve that value. "Projected Value" means that at the end of the five years from the date of grant, assuming an increase in market price of 15% per annum during the five years, the stock option may be exercised to obtain the stated value in excess of the exercise price. (d) Upon the Effective Date, any options granted to you prior to November 1, 1999 shall become vested, (e) You will be entitled to participate in Dynegy's benefits programs for senior management executives, including, without limitation, Dynegy's deferred compensation plan for executives, as well as any Split Dollar Agreement between the Company and the Watson 1996 Family Trust (an irrevocable trust created on March 22, 1996, by you and Kim R. Watson, as the Grantors, and David C. Feldman, as the Trustee). Without limiting the foregoing, you shall receive the perquisites set forth on Schedule I attached hereto and by this reference incorporated herein. (f) During the Term of this Agreement, or until termination of this Agreement if this Agreement terminates prior to expiration of the Term (except as provided in Paragraph 2(a) hereof), the Company will pay all premiums on a policy of insurance providing term protection only and no cash values, with a death benefit payable upon your death in the amount of $1,000,000. You shall at all times own the policy and have the right to designate the beneficiary of any death proceeds. You will be responsible for policy selection, coverage and effectiveness of the policy and any income taxes arising in connection therewith; the Company's only obligation being to pay such premiums. (g) In the event that you remain continuously employed through the third anniversary of the Effective Date or your separation from employment prior to completion of the Term of the Agreement is due to termination pursuant to Paragraph 2(c), then the Company shall provide to you at its expense for a period of five years thereafter an office separately located from the offices of the Company that is comparable in size and facilities to that provided by the Company during the Term of this Agreement. The Company shall also pay for maintenance of such office space. You shall also be entitled to equip the office with (and retain as your own following completion of the five year period) the furniture, cabinets, pictures, equipment and office furnishings (but not any intrinsically valuable art works or collectibles) used by you in your office at the end of the Term or at the time of termination. You shall be responsible for the tax consequences to you of the provisions of this Paragraph 3(g). 4. CONFIDENTIALITY You recognize and acknowledge that: (a) You will have access to certain information concerning the Company that is confidential and proprietary and constitutes valuable and unique property of the Company. You agree that you will not at any time, either during or after your employment, disclose to 6 Mr. Charles L. Watson January 18, 2000 Page 6 others, use, copy or permit to be copied, except pursuant to your duties on behalf of the Company or its successors, assigns or nominees, any secret or confidential information of the Company (whether or not developed by you) without the prior written consent of the Board of Directors. The term "secret or confidential information of the Company" (sometimes referred to herein as "Confidential Information") shall include, without limitation, the Company's plans, strategies, potential acquisitions, costs, prices, systems for buying, selling, and/or trading natural gas, natural gas liquids, crude oil, coal, and electricity, client lists, pricing policies, financial information, the names of and pertinent information regarding suppliers, computer programs, policy or procedure manuals, training and recruiting procedures, accounting procedures, the status and content of the Company's contracts with its suppliers or clients, or servicing methods and techniques at any time used, developed, or investigated by the Company, before or during your tenure of employment to the extent any of the foregoing are (i) not generally available to the public and (ii) maintained as confidential by the Company. You further agree to maintain in confidence any confidential information of third parties received as a result of your employment and duties with the Company. (b) At the termination of your employment, you will deliver to the Company, as determined appropriate by the Company, all correspondence, memoranda, notes, records, client lists, computer systems, programs, or other documents and all copies thereof made, composed or received by you, solely or jointly with others, and which are in your possession, custody or control at such date and which are related in any manner to the past, present or anticipated business of the Company. (c) To protect and safeguard the Company's trade secrets and Confidential Information and also the Company's goodwill with its suppliers and clients, for that period of time following the date of termination of your employment for any reason other than pursuant to Paragraph 2(c) hereof (i.e., in the event of a termination pursuant to the first paragraph of Paragraph 2(c), the non-compete obligations of this Paragraph 4(c) shall terminate) through the expiration of the Term or twenty-four (24) months from the date of termination, whichever is earlier, you will not, within a 50 mile radius of any location where the Company had an office at any time during the Term hereof or any location where a client or supplier of the Company (which is a material client or supplier at any time during the Term hereof) had an office at any time during the Term hereof, without the prior written consent of the Board of Directors, directly or indirectly, engage in or be interested in (as owner, partner, shareholder, employee, director, agent, consultant or otherwise), any business which is a competitor of the Company, as hereinafter defined. For purposes of this Agreement, a "competitor of the Company" is any entity, including, without limitation, a corporation, sole proprietorship, partnership, joint venture, syndicate, trust or any other form of organization or a parent, subsidiary or division of any of the foregoing, which, during such period or the immediately preceding fiscal year of such entity, was engaged in the unregulated marketing, gathering, transportation or processing of natural gas or derivatives of natural gas or other hydrocarbons or electricity. For purposes of this paragraph, the following entities shall not be deemed to be competitors of the Company: (i) a Local Distribution Company ("LDC") to the extent that any purchases or sales by such LDC are only for consumption on its system; (ii) a natural gas producer to the extent that such producer sells only its own production or production of other working interest owners in wells in which it owns 7 Mr. Charles L. Watson January 18, 2000 Page 7 an interest; (iii) a natural gas pipeline company in the jurisdictional aspects of its business, i.e., other than a nonjurisdictional marketing affiliate or production affiliate (except as to such production affiliate's own production as described in clause (ii) of this Paragraph 4(c)); or (iv) an integrated regulated electric and/or gas utility as long as such utility does not engage in the unregulated marketing of its generation or power trading other than that related to the generation or power marketing allocated to its own service areas. The terms of this Paragraph 4(c) shall not apply to your present or future investments in the securities of companies listed on a national securities exchange or traded on the over-the-counter market to the extent such investments do not exceed five percent (5%) of the total outstanding shares of such company. (d) For a period of twenty-four (24) months after the expiration or termination of your employment for whatever reason, other than pursuant to Paragraph 2(c) above or for a period of twelve months following the termination of your employment pursuant to Paragraph 2(c) above, you shall not solicit, raid, entice, encourage or induce any person who at the time of such expiration or termination of employment is an employee of the Company, or any of its subsidiaries or affiliated companies, to become employed by any person, firm or corporation, and you shall not approach any such employee for such purpose or authorize or knowingly approve the taking of such actions by any other person, firm or corporation or assist any such person, firm or corporation in taking such action. (e) You agree that the foregoing restrictions contain reasonable limitations as to the time, geographical area, and scope of activity to be restrained and that these restrictions do not impose any greater restraint than is necessary to protect the goodwill and other legitimate business interests of the Company, including, but not limited to, the protection of Confidential Information. You also agree that the general public shall not be harmed by enforcement of this Paragraph 4. Should any provision in this Paragraph 4 be held unreasonably broad with respect to the restrictions as to time, geographical area or scope of activity to be restrained, any such restriction shall be construed by limiting and reducing it to the extent necessary to render it reasonable, and as so construed, such provision shall be enforced. Accordingly, you consent and agree that if you violate any of the provisions of this Paragraph 4, the Company and its subsidiaries and affiliated companies would sustain irreparable harm and, therefore, in addition to any other remedies which the Company may have under this Agreement or otherwise, the Company shall be entitled to an injunction from any court of competent jurisdiction restraining you from committing or continuing any such violation of this Paragraph 4. You acknowledge that damages at law would not be an adequate remedy for violation of this Paragraph 4, and you therefore agree that the provisions of this Paragraph 4 may be specifically enforced against you in any court of competent jurisdiction. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to the Company for such breach or threatened breach, including the recovery of damages from you. 5. INDEMNIFICATION If, at any time during or after the Term of this Agreement, you are made a party to, or are threatened to be made a party in, any civil, criminal or administrative action, suit or proceeding by reason of the fact that you are or were a director, officer, employee or agent of the 8 Mr. Charles L. Watson January 18, 2000 Page 8 Company, or of any other corporation or any partnership, joint venture, trust or other enterprise for which you served as such at the request of the Company, then you shall be indemnified by the Company, to the fullest extent permitted under applicable law, against expenses actually and reasonably incurred by you or imposed on you in connection with, or resulting from, the defense of such action, suit or proceeding, or in connection with, or resulting from, any appeal therein if you acted in good faith and in a manner you reasonably believed to be in or not opposed to the best interest of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe your conduct was unlawful, except with respect to matters as to which it is adjudged that you are liable to the Company or to such other corporation, partnership, joint venture, trust or other enterprise for gross negligence or willful misconduct in the performance of your duties. As used herein, the term "expenses" shall include all obligations actually and reasonably incurred by you for the payment of money, including, without limitation, attorney's fees, judgments, awards, fines, penalties and amounts paid in satisfaction of a judgment or in settlement of any such action, suit or proceeding, except amounts paid to the Company or such other corporation, partnership, joint venture, trust or other enterprise by you. The foregoing indemnification provisions shall be in addition to any other rights to indemnification to which you may be entitled. 6. ARBITRATION The parties hereto may attempt to resolve any dispute hereunder informally via mediation or other means. Otherwise, any controversy or claim arising out of or relating to this Agreement, or any breach thereof, shall, except as provided in Paragraph 4, be adjudged only by arbitration in accordance with the rules of the American Arbitration Association, and judgment upon such award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration shall be held in the city of Houston, Texas, or such other place as may be agreed upon at the time by the parties to the arbitration. The arbitrator(s) shall, in their award, allocate between the parties the costs of arbitration, which shall include reasonable attorneys' fees of the parties, as well as the arbitrators' fees and expenses, in such proportions as the arbitrator(s) deem just; provided, however, notwithstanding the above, in the event you are the prevailing party, then the Company agrees to reimburse you for all such costs of arbitration, including, but not limited to, attorneys' fees and expenses reasonably incurred by you; provided further, notwithstanding the above, in the event the Company is the prevailing party, then the total costs of arbitration, including but not limited to attorneys' fees reasonably incurred by the Company and arbitrators' fees and expenses, that may be allocated to you by the arbitrator(s) shall not in any event exceed Twenty-Five Thousand Dollars ($25,000). Notwithstanding the foregoing, you shall be entitled to seek specific performance in a court of competent jurisdiction of your right to be paid your full compensation until your separation from employment, during the pendency or dispute of any controversy arising under or in connection with this Agreement. 7. EXCISE TAXES (a) In the event that any payment or benefit received or to be received by you pursuant to the terms of this Agreement in connection with and contingent on the termination of your employment with the Company (the "Contract Payments") or of any other plan, arrangement or agreement of the Company (or any affiliate) ("Other Payments" and, together 9 Mr. Charles L. Watson January 18, 2000 Page 9 with the Contract Payments, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986 (as amended from time to time, the "Code") as determined as provided below, the Company shall pay to you, at the time specified in Section 7(b) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by you, after deduction of the Excise Tax on Payments and any federal, state and local income tax and the Excise Tax upon the Gross-Up Payment, and any interest, penalties or additions to tax payable by you with respect thereto, shall be equal to the total present value (using the applicable federal rate (as defined in Section 1274(d) of the Code in such calculation) of the Payments at the time such Payments are to be made. The Company shall have the right to make any such Gross-Up Payment, in whole or in part, in the form of a noncash payment of equal value (as determined by Independent Counsel) to that portion of the Gross-Up Payment had it been paid in cash. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of the Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent counsel selected by the Company and reasonably acceptable to you ("Independent Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of section 280G(b)(1) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit included in the Payments or Gross-Up Payment, as applicable, shall be determined by Independent Counsel in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation applicable to the individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of your residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. (b) The Gross-Up Payments provided for in Paragraph 7(a) hereof shall be made upon the earlier of (i) the payment to you of any Payment or (ii) the imposition upon you or payment by you of any Excise Tax. (c) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Independent Counsel that the Excise Tax is less than the amount taken into account under Section 7(a) hereof, you shall repay to the Company within thirty (30) days of your receipt of notice of such final determination or opinion the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise 10 Mr. Charles L. Watson January 18, 2000 Page 10 Tax or a federal, state and local income tax deduction) plus any interest received by you on the amount of such repayment. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Independent Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess within thirty (30) days of the Company's receipt of notice of such final determination or opinion. (d) In the event of any change in, or further interpretation of, sections 280G or 4999 of the Code and the regulations promulgated thereunder, you shall be entitled, by written notice to the Company, to request an opinion of Independent Counsel regarding the application of such change to any of the foregoing, and the Company shall use its best efforts to cause such opinion to be rendered as promptly as practicable. All fees and expenses of such Independent Counsel incurred in connection with this Agreement shall be borne by the Company. 8. PHYSICAL EXAMINATION You agree, during each fiscal year of the Company, to undergo a complete physical examination at Company expense, and you further agree that the finding or diagnosis of a terminal illness or physical or mental condition that will materially impair your ability to perform your duties and responsibilities under this Agreement, which is the result of such examination, will be disclosed to the Executive Committee of the Board of Directors. You agree to direct such disclosure to the Executive Committee of the Board of Directors by an instrument in writing, if necessary, but no disclosure shall be made to any other party without your written consent. 9. OTHER PROVISIONS (a) THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICTS OF LAW, RULE OR PRINCIPLE THAT MIGHT OTHERWISE REFER TO THE SUBSTANTIVE LAW OF ANOTHER JURISDICTION. (b) Except as otherwise indicated, this Agreement is not assignable without the written authorization of both parties, provided that the Company may assign this Agreement to any entity to which the Company transfers substantially all of its assets or to any entity which is a successor to the Company by reorganization, incorporation, merger or similar business combination. (c) Except as otherwise provided herein, the provisions of Paragraphs 4, 5 and 6 of this Agreement shall survive the termination of this Agreement. (d) Except as otherwise provided in Paragraph 7 hereof, all payments to you under this Agreement will be subject to the withholding of all applicable employment taxes and income taxes; provided, however, that at your request the parties hereto will use reasonable efforts to explore alternatives to allow the Company to make charitable contributions on behalf 11 Mr. Charles L. Watson January 18, 2000 Page 11 of the employee by redirecting a portion of your annual bonuses to charitable organization(s) chosen by you in accordance with Paragraph 3(b) of this Agreement. (e) This Agreement supersedes all previous employment agreements, written or oral, between the Company and you. This Agreement may be amended only by written amendment duly executed by both parties hereto or their legal representatives and authorized by action of the Board of Directors. Except as otherwise specifically provided in this Agreement, no waiver by either party hereto of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a subsequent breach of such condition or provision or a waiver of a similar or dissimilar provision or condition at the same or at any prior or subsequent time. (f) Any notice or other communication required or permitted pursuant to the terms of this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States mail, first class, postage prepaid and registered with return receipt requested, addressed to the intended recipient at his or its address set forth below and, in the case of a notice or other communication to the Company, directed to the attention of the Board of Directors with a copy to the Secretary of the Company, or to such other address as the intended recipient may have theretofore furnished to the sender in writing in accordance herewith, except that until any notice of change of address is received, notices shall be sent to the following addresses: IF TO YOU: IF TO THE COMPANY: Charles L. Watson Dynegy Inc. 46 Wincrest Falls 1000 Louisiana, Suite 5800 Cypress, Texas 77429 Houston, TX 77002 Attn: Chief Executive Officer (g) If any one or more of the provisions or parts of a provision contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision or part of a provision of this Agreement, but this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision or part of a provision had never been contained herein and such provisions or part thereof shall be reformed so that it would be valid, legal and enforceable to the maximum extent permitted by law. (h) Neither you nor the Company will make or authorize any public statement disparaging the other in its or his business interests and affairs. Notwithstanding the foregoing, neither party shall be (i) required to make any statement which it or he believes to be false or inaccurate, or (ii) restricted in connection with any litigation, arbitration or similar proceeding or with respect to its response to any legal process. The provisions in this Paragraph 9(h) shall survive the termination of your employment hereunder, irrespective of the reason therefor. (i) The waiver by the Company of breach of any provision of this Agreement by you shall not operate or be construed as a waiver of any subsequent breach by you. The 12 Mr. Charles L. Watson January 18, 2000 Page 12 waiver by you of a breach of any provision of this Agreement by the Company shall not operate or be construed as a waiver of any subsequent breach by the Company. (j) You shall not be required to mitigate damages (or the amount of any compensation provided under this Agreement to be paid) following your termination of employment, by seeking employment or otherwise. (k) If any provision of this Agreement as applied to either party or to any circumstances shall be adjudged by a court of competent jurisdiction to be void or unenforceable, the same shall in no way affect any other provision of this Agreement or the validity or enforceability of this Agreement. (1) The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. (m) This Agreement may be executed in one or more counterparts, which shall, collectively and separately, constitute one agreement. (n) Notwithstanding anything to the contrary set forth in this Agreement, the Company may cause any of its subsidiaries for which you render services to pay or otherwise satisfy, in whole or in part, some or all of the Company's obligations hereunder. 13 Mr. Charles L. Watson January 18, 2000 Page 13 If the foregoing reflects your understanding of the terms of your employment with the Company, please execute each copy of this letter in the space provided below. DYNEGY INC. By: --------------------------------------- Name: --------------------------------------- Title: --------------------------------------- AGREED AND ACCEPTED this ____ day of January, 2000 - ------------------------------------- Charles L. Watson 14 Watson Employment Agreement - Schedule I EXECUTIVE PERQUISITES Except as provided below, as long as you remain in the employment of the Company during the Term of this Agreement, you will be entitled to the following: 1. At your option, the use of an automobile of a type equivalent to that presently provided by the Company for use by you, your spouse and members of your immediate family, or a cash automobile allowance of $2,000 per month. 2. Personal membership in the Petroleum Club in Houston, Texas and two (2) other downtown Houston luncheon clubs of your choice, including the reimbursement of all dues and business-related expenses. These memberships shall be assigned to you in the event of termination of the Agreement for any reason, and you shall pay dues from the date of termination but you shall not be obligated to reimburse the Company for any amounts paid by the Company prior to termination. 3. Personal country club membership in two (2) country clubs of your choice, including the reimbursement of all dues and business-related expenses. These memberships shall be assigned to you in the event of termination of the Agreement for any reason, and you shall pay dues from the date of termination but you shall not be obligated to reimburse the Company for any amounts paid by the Company prior to termination. Notwithstanding anything to the contrary in this Agreement or this Schedule, in no case shall the Company be obligated to pay any amount of dues, fees or reimbursement for or to any country club or luncheon club that, in the determination of the Board of Directors, in its sole discretion, restricts membership or the performance of services or the use of facilities on the basis of race, religion, gender or national origin. 4. Vacations and holidays in accordance with the Company's policies in effect from time to time for its senior executive officers, but not less than six (6) weeks of vacation during each fiscal year. 5. A benefit package including medical, hospital, dental, disability and life insurance plans and coverage for you and your spouse and children at least as favorable to you (and your spouse and children) as that provided to you immediately prior to the commencement of the Term of this Agreement unless, with respect to any particular plan or coverage, the continuation of such existing plan or coverage would have material adverse financial or regulatory consequences to the Company. 6. Reimbursement of fees for financial and/or federal income tax planning (and reasonable accounting and legal fees associated therewith), the allocable cost of which perquisites to you are not to exceed One Hundred Thousand Dollars ($100,000) per annum. 15 7. Use of any aircraft owned or leased by the Company for Company business in accordance with the policies adopted by the Board of Directors, which policy is subject to the approval of the Board of Directors from time to time. You may also, in accordance with such policies, which shall not be amended as they apply to you without your prior consent, use any aircraft owned or leased by the Company for your own personal business; provided, however, that (i) such use does not adversely interfere with the use of such aircraft for Company business, (ii) you shall maintain any records reasonably requested by the Board of Directors, (iii) you shall compensate the company for such use at the Company's actual after-tax costs for the use of such aircraft and (iv) such personal use by you does not exceed fifty (50) hours of flight time usage of such aircraft on a calendar year basis. You shall be responsible for paying any income taxes attributable to taxable income arising from such aircraft use. EX-10.10 6 EMPLOYMENT AGREEMENT - STEPHEN W. BERGSTROM 1 EXECUTION COPY EXHIBIT 10.10 January 18, 2000 Mr. Stephen W. Bergstrom 1715 Chestnut Grove Kingwood, Texas 77345 Dear Steve: Set forth below are the terms of your employment (the "Agreement") with Dynegy Inc. (hereinafter referred to as "Dynegy" or the "Company"). 1. TITLE AND DUTIES Your title shall be President and Chief Operating Officer of the Company. You will be responsible for the duties typical to such position and shall have such other duties as may be delegated from time to time by your immediate supervisor. You will be employed at Dynegy's headquarters in Houston, Texas. You shall devote your full time, energy and skill to the performance of your duties for Dynegy, and will exercise due diligence and reasonable care in the performance of such duties. During the Term (as defined below) of this Agreement, you shall report to the Company's Chief Executive Officer or Chairman of the Board and shall remain a member of the Company's Board of Directors. 2. TERM (a) Unless earlier terminated as provided for herein, the term of this Agreement will be for four (4) years, commencing on the Effective Date (as defined below) and ending on the fourth anniversary of the Effective Date (such period, as extended pursuant to the next succeeding sentence, if applicable, the "Term"). The Term shall automatically be extended for additional one (1) year periods unless either the Company or you provides written notice at least sixty (60) days prior to the date on which this Agreement would otherwise be automatically extended that such party is electing not to so extend the Term. The term "Effective Date" means the date of the closing of the proposed merger of Dynegy Inc. and Illinova Corporation pursuant to that certain merger agreement dated as of June 14, 1999, as amended. 2 Mr. Stephen W. Bergstrom January 18, 2000 Page 2 (b) If your employment with Dynegy is terminated due to your voluntary resignation or by the Company for "cause", this Agreement shall terminate immediately (except for the confidentiality, non-competition and non-solicitation provisions of Paragraph 4 and the provisions of Paragraphs 5 and 6), and the Company shall have no further obligation to you except for the payment of amounts due through the date of such termination and except that you will be fully vested with regard to all stock options (irrespective of the date of the grant of such options and irrespective of the vesting schedule otherwise applicable to such options) granted to you hereunder as a signing bonus, as provided in Paragraph 3(d) below, and you shall be permitted to retain such options for future exercise or sell such stock received on exercise as though you had remained in the employment of the Company until the end of the Term. The Company shall take such actions as permitted by applicable law to cause such vesting and option retention. However, nothing in this Paragraph 2(b) shall require accelerated vesting or accelerated exercisability of any other stock options that may have been or may be granted to you unless otherwise expressly provided for herein. You further agree that the benefits which you have received from the execution of this Agreement through the date of such termination constitute sufficient consideration for your obligations pursuant to Paragraph 4, notwithstanding the fact that the Company has no further obligation to you except for the payment of amounts due before the date of such termination and except for you being fully vested with regard to all stock options (irrespective of the date of the grant of such options and irrespective of the vesting schedule otherwise applicable to such options) granted to you hereunder as a signing bonus, as provided in Paragraph 3(d) below, and you shall be permitted to retain such options for future exercise or sell such stock received on exercise as though you had remained in the employment of the Company until the end of the Term, and the Company shall take such actions as permitted by applicable law to cause such vesting and option retention. For purposes of this Agreement, you may be terminated for "cause" as a result of (i) your refusal to implement or adhere to lawful policies or lawful directives of the Board of Directors of Dynegy (the "Board of Directors") or your immediate supervisor that is not cured within ten (10) days after written notice of such refusal is delivered to you from the Company; (ii) serious misconduct, dishonesty or disloyalty, directly related to the performance of your duties for the Company or gross negligence in the performance of your duties for the Company that is not cured within ten (10) days after written notice of such misconduct, dishonesty or disloyalty or gross negligence is delivered to you from the Company; (iii) your being convicted (or entering into a plea bargain admitting or not contesting criminal guilt) in any criminal felony proceeding; (iv) drug or alcohol abuse; (v) continued failure to perform your duties under this Agreement, which is not cured within ten (10) days after written notice of such failure is provided to you by Dynegy; or (vi) any other material breach of this Agreement by you that is not cured within ten (10) days after written notice of such breach is delivered to you from the Company. (c) If your employment is terminated during the Term of this Agreement due to resignation following "constructive termination" (as defined below) or for any other reason other than your voluntary resignation, death, disability or discharge for cause, you shall receive as your sole compensation in lieu of further payments to you pursuant to Paragraph 3 hereof: (i) a lump sum amount equal to the product of (x) 2.99 and (y) the greater of (a) the average annual Base Salary and incentive compensation, whether payable in cash or stock options, you were paid by the Company for the highest three (3) calendar years preceding the calendar year in 3 Mr. Stephen W. Bergstrom January 18 2000 Page 3 which your employment is terminated (or such shorter period as you have actually been employed by the Company), or (b) your Base Salary and target bonus amount for the year in which your employment is terminated; (ii) a lump sum amount equal to the net present value, as determined by the Board of Directors in its sole and absolute discretion, of the benefits to be provided to you in Paragraphs 3(f) and 3(g) of this Agreement and such other perquisites (if any) being provided to you on the date of your termination, as if you were still employed for the remainder of the Term of this Agreement, with regard to those benefits to be provided to you during the Term of this Agreement, and as if you had completed the Term of this Agreement with regard to those benefits to be provided to you upon completion of the Term of this Agreement; (iii) any employee stock options granted to you prior to or during the Term of this Agreement shall become vested as of the date of your resignation due to such constructive termination or discharge not for cause, and you shall have the right to exercise any such vested options through the end of the Term of this Agreement or one year from the date of termination, whichever is later; and (iv) for a period of thirty-six (36) months from the date of such termination, all health and welfare benefits the Company was maintaining for you and your family as of the date of such resignation or discharge. For purposes of this Agreement a "constructive termination" shall be deemed to have occurred in the event that: (i) your Base Salary as defined in Paragraph 3(a), bonus compensation under Paragraph 3(b), target range of annual option grants under Paragraph 3(c) or other compensation as described in Paragraphs 3(f) and 3(g) is reduced; (ii) you are removed from the Board of Directors or no longer report to the Chief Executive Officer or Chairman of the Board or a significant diminution in your responsibilities, authority or scope of duties is effected by the Board of Directors, and such diminution is made without your written consent (without regard to whether or not any change is made to your title); (iii) the Company materially breaches this Agreement; (iv) the relocation of the Company's principal executive offices to a location, or the Company requires you to be based, outside a fifty (50) mile radius from the city limits of Houston, Texas; or (v) in the event any "person" other than a mutual fund that acquires the stock solely for investment purposes or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total voting stock of the Company regardless of whether any change is made to your job duties, responsibilities or compensation. A "constructive termination" shall not be deemed to have occurred in a change of control situation other than as set forth in clauses (i) through (v) above. A "constructive termination" shall not be deemed to have occurred in connection with a merger or consolidation to which the Company is a party where the surviving entity which is the ultimate parent company of the merged or consolidated entities is a public company, provided no "person" or "group" as referenced in clause (v) above owns more than 50% of the total voting stock of such surviving entity unless a "constructive termination" under clauses (i), (ii), (iii) or (iv) has occurred. For the avoidance of doubt, in order to claim the benefits payable hereunder in the event of a constructive termination, you must resign. Any resignation by you as a result of assertion of a constructive termination shall be communicated by delivery to the Board of Directors within thirty (30) days from the commencement of such constructive termination by written notice setting forth the grounds therefor, during which period the Company shall be entitled to cure or remedy the matters set 4 Mr. Stephen W. Bergstrom January 18 2000 Page 4 forth in such notice to your reasonable satisfaction. Unless you withdraw such notice prior to the expiration of such thirty-day (30) period, such resignation shall take effect upon the expiration of thirty (30) days from the date of the delivery of such notice. Any other resignation by you shall be communicated by thirty (30) days' advance written notice. (d) If you die, or become disabled and cannot perform your duties, your employment hereunder shall be terminated immediately (except that the confidentiality, noncompetition and nonsolicitation provisions of Paragraph 4 and the provisions of Paragraphs 5 and 6 shall survive the termination of your employment) and: (i) you (or your estate) shall be entitled to the Base Salary (as defined in Paragraph 3(a)) payable to you hereunder for twelve (12) months following the month in which you die or become disabled, plus the amount of any target bonus as described in Paragraph 3(b) for the year of death or disability, prorated for the portion of the twelve-month (12) period elapsed in which the date of death or disability occurs; (ii) you (or your estate) shall receive, for a period of twenty-four (24) months from the date of your death or disability, all health insurance and health benefits that the Company was maintaining for you and/or your estate and for your family as of the date of your death or disability; (iii) for a period of five (5) years from the date of your death or disability, the Company shall continue to make contributions pursuant to any Split Dollar Agreements between the Company and you (or any irrevocable trust created by you); and (iv) any employee stock options granted to you during the Term of this Agreement shall become vested as of the date of your death or disability on the same terms as provided for the vesting of stock options in Paragraph 2(c) above. For purposes of this Agreement, you shall be disabled as of the first date on which you become eligible to receive disability benefits under the Company's long-term disability plan (or Social Security disability benefits at a time when the Company does not maintain a long-term disability plan or such plan is not available to you). (e) Unless otherwise specified herein, all payments under this Agreement shall be paid in a lump sum, less applicable withholding taxes, within thirty (30) days following the date of your termination. 3. COMPENSATION (a) Each year during the Term hereof, you will be paid a base salary of $850,000 per annum ("Base Salary"), payable in accordance with the Company's payroll guidelines. Increases may be made to your Base Salary at the discretion of the Board of Directors based upon your individual performance. (b) You shall be a participant in the Company's Incentive Compensation Plan. As part of Dynegy's incentive compensation program, you will have the opportunity to earn a target bonus in an amount equal to 100% of your Base Salary and a maximum cash award in an amount equal to 200% of your Base Salary, dependent upon certain financial or performance objectives, determined in accordance with such program and by the Board of Directors. To the extent any incentive compensation in excess of the maximum cash amount referenced above is payable under the Incentive Compensation Plan in any year to you, the Company will pay you any such amounts in noncash equivalents (e.g., stock options or restricted securities of the Company) of equal value, as determined by the Board of Directors in its sole and absolute 5 Mr. Stephen W. Bergstrom January 18 2000 Page 5 discretion. At your election, in lieu of paying you all or part of such incentive compensation bonus, the Company will allow you to direct that all or part of such incentive compensation be allocated by the Company to, or expended directly for, charitable contributions of your selection and/or payments of insurance premiums pursuant to Split Dollar Agreements between the Company and you (or any irrevocable trust created by you). (c) Upon the Effective Date, you shall receive an initial grant of stock options pursuant to the Company's Long Term Incentive Plan (the "LTIP") with a projected value equal to 300% of your Base Salary. Each year during the Term of this Agreement, you will be eligible to receive stock option grants granted to an employee holding the positions of "President" and "Chief Operating Officer" in accordance with the requirements and provisions of the LTIP. The current target range for annual option grants for your position is a median of 200% and a 75th percentile of 300% of your Base Salary. You recognize that any value of an award of "market" options under the LTIP is a projected value, which is subject to the future performance of the Company stock, and that there is no guarantee that the actual value of such options will achieve that value. "Projected Value" means that at the end of the five years from the date of grant, assuming an increase in market price of 15% per annum during the five years, the stock option may be exercised to obtain the stated value in excess of the exercise price. These options are subject to the vesting, forfeiture and other terms and conditions of the LTIP. (d) Upon the Effective Date, you will receive, as a signing bonus, a grant of discounted stock options under Dynegy's Market and Employee Equity Option Plan ("EEOP") with an immediate in-the-money value equal to $2,000,000, with one-third (1/3) of these options vesting on each of the first, second and third anniversary of the Effective Date. These options shall be subject to the forfeiture and other terms and conditions of the EEOP. You and the Company acknowledge and agree that: (i) as of the Effective Date, that certain Employment Agreement (as the same may have been amended, modified or supplemented from time to time, the "Employment Agreement"), dated as of May 8, 1997, between you and NGC Corporation, is hereby terminated and of no further force and effect and (ii) the payment granted to you pursuant to this Paragraph 3(d) is in full satisfaction of all of the Company's remaining duties and obligations under the Employment Agreement. (e) Upon the Effective Date, any options granted to you prior to November 1, 1999 shall become vested. (f) You will be entitled to participate in Dynegy's benefits programs for senior management executives, including, without limitation, Dynegy's deferred compensation plan for executives, as well as any Split Dollar Agreement between the Company and you (or any irrevocable trust created by you). Without limiting the foregoing, you shall receive the perquisites set forth on Schedule I attached hereto and by this reference incorporated herein. (g) During the Term of this Agreement, or until termination of this Agreement if this Agreement terminates prior to expiration of the Term (except as provided in Paragraph 2(a) hereof), the Company will pay all premiums on a policy of insurance providing term protection only and no cash values, with a death benefit payable upon your death in the amount of $1,000,000. You shall at all times own the policy and have the right to designate the 6 Mr. Stephen W. Bergstrom January 18 2000 Page 6 beneficiary of any death proceeds. You will be responsible for policy selection, coverage and effectiveness of the policy and any income taxes arising in connection therewith; the Company's only obligation being to pay such premiums. 4. CONFIDENTIALITY You recognize and acknowledge that: (a) You will have access to certain information concerning the Company that is confidential and proprietary and constitutes valuable and unique property of the Company. You agree that you will not at any time, either during or after your employment, disclose to others, use, copy or permit to be copied, except pursuant to your duties on behalf of the Company or its successors, assigns or nominees, any secret or confidential information of the Company (whether or not developed by you) without the prior written consent of the Board of Directors. The term "secret or confidential information of the Company" (sometimes referred to herein as "Confidential Information") shall include, without limitation, the Company's plans, strategies, potential acquisitions, costs, prices, systems for buying, selling, and/or trading natural gas, natural gas liquids, crude oil, coal, and electricity, client lists, pricing policies, financial information, the names of and pertinent information regarding suppliers, computer programs, policy or procedure manuals, training and recruiting procedures, accounting procedures, the status and content of the Company's contracts with its suppliers or clients, or servicing methods and techniques at any time used, developed, or investigated by the Company, before or during your tenure of employment to the extent any of the foregoing are (i) not generally available to the public and (ii) maintained as confidential by the Company. You further agree to maintain in confidence any confidential information of third parties received as a result of your employment and duties with the Company. (b) At the termination of your employment, you will deliver to the Company, as determined appropriate by the Company, all correspondence, memoranda, notes, records, client lists, computer systems, programs, or other documents and all copies thereof made, composed or received by you, solely or jointly with others, and which are in your possession, custody or control at such date and which are related in any manner to the past, present or anticipated business of the Company. (c) To protect and safeguard the Company's trade secrets and Confidential Information and also the Company's goodwill with its suppliers and clients, for that period of time following the termination of your employment for any reason other than pursuant to Paragraph 2(c) hereof (i.e., in the event of a termination pursuant to the first paragraph of Paragraph 2(c), the non-compete obligations of this Paragraph 4(c) shall terminate) through the expiration of the Term or twenty-four (24) months from the date of termination, whichever is earlier, you will not, within a 50 mile radius of any location where the Company had an office at any time during the Term hereof or any location where a client or supplier of the Company (which is a material client or supplier at any time during the Term hereof) had an office at any time during the Term hereof, without the prior written consent of the Board of Directors, directly or indirectly, engage in or be interested in (as owner, partner, shareholder, employee, director, agent, consultant or otherwise), any business which is a competitor of the Company, as 7 Mr. Stephen W. Bergstrom January 18 2000 Page 7 hereinafter defined. For purposes of this Agreement, a "competitor of the Company" is any entity, including, without limitation, a corporation, sole proprietorship, partnership, joint venture, syndicate, trust or any other form of organization or a parent, subsidiary or division of any of the foregoing, which, during such period or the immediately preceding fiscal year of such entity, was engaged in the unregulated marketing, gathering, transportation or processing of natural gas or derivatives of natural gas or other hydrocarbons or electricity. For purposes of this paragraph, the following entities shall not be deemed to be competitors of the Company: (i) a Local Distribution Company ("LDC") to the extent that any purchases or sales by such LDC are only for consumption on its system; (ii) a natural gas producer to the extent that such producer sells only its own production or production of other working interest owners in wells in which it owns an interest; (iii) a natural gas pipeline company in the jurisdictional aspects of its business, i.e., other than a nonjurisdictional marketing affiliate or production affiliate (except as to such production affiliate's own production as described in clause (ii) of this Paragraph 4(c)); or (iv) an integrated regulated electric and/or gas utility as long as such utility does not engage in the unregulated marketing of its generation or power trading other than that related to the generation or power marketing allocated to its own service areas. The terms of this Paragraph 4(c) shall not apply to your present or future investments in the securities of companies listed on a national securities exchange or traded on the over-the-counter market to the extent such investments do not exceed one percent (1%) of the total outstanding shares of such company. (d) For a period of twenty-four (24) months after the expiration or termination of your employment for whatever reason, other than pursuant to Paragraph 2(c) above or for a period of twelve months following the termination of your employment pursuant to Paragraph 2(c) above, you shall not solicit, raid, entice, encourage or induce any person who at the time of expiration or termination of employment is an employee of the Company, or any of its subsidiaries or affiliated companies, to become employed by any person, firm or corporation, and you shall not approach any such employee for such purpose or authorize or knowingly approve the taking of such actions by any other person, firm or corporation or assist any such person, firm or corporation in taking such action. (e) You agree that the foregoing restrictions contain reasonable limitations as to the time, geographical area, and scope of activity to be restrained and that these restrictions do not impose any greater restraint than is necessary to protect the goodwill and other legitimate business interests of the Company, including, but not limited to, the protection of Confidential Information. You also agree that the general public shall not be harmed by enforcement of this Paragraph 4. Should any provision in this Paragraph 4 be held unreasonably broad with respect to the restrictions as to time, geographical area or scope of activity to be restrained, any such restriction shall be construed by limiting and reducing it to the extent necessary to render it reasonable, and as so construed, such provision shall be enforced. Accordingly, you consent and agree that if you violate any of the provisions of this Paragraph 4, the Company and its subsidiaries and affiliated companies would sustain irreparable harm and, therefore, in addition to any other remedies which the Company may have under this Agreement or otherwise, the Company shall be entitled to an injunction from any court of competent jurisdiction restraining you from committing or continuing any such violation of this Paragraph 4. You acknowledge that damages at law would not be an adequate remedy for 8 Mr. Stephen W. Bergstrom January 18 2000 Page 8 violation of this Paragraph 4, and you therefore agree that the provisions of this Paragraph 4 may be specifically enforced against you in any court of competent jurisdiction. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to the Company for such breach or threatened breach, including the recovery of damages from you. 5. INDEMNIFICATION If, at any time during or after the Term of this Agreement, you are made a party to, or are threatened to be made a party in, any civil, criminal or administrative action, suit or proceeding by reason of the fact that you are or were a director, officer, employee or agent of the Company, or of any other corporation or any partnership, joint venture, trust or other enterprise for which you served as such at the request of the Company, then you shall be indemnified by the Company, to the fullest extent permitted under applicable law, against expenses actually and reasonably incurred by you or imposed on you in connection with, or resulting from, the defense of such action, suit or proceeding, or in connection with, or resulting from, any appeal therein if you acted in good faith and in a manner you reasonably believed to be in or not opposed to the best interest of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe your conduct was unlawful, except with respect to matters as to which it is adjudged that you are liable to the Company or to such other corporation, partnership, joint venture, trust or other enterprise for gross negligence or willful misconduct in the performance of your duties. As used herein, the term "expenses" shall include all obligations actually and reasonably incurred by you for the payment of money, including, without limitation, attorney's fees, judgments, awards, fines, penalties and amounts paid in satisfaction of a judgment or in settlement of any such action, suit or proceeding, except amounts paid to the Company or such other corporation, partnership, joint venture, trust or other enterprise by you. The foregoing indemnification provisions shall be in addition to any other rights to indemnification to which you may be entitled. 6. ARBITRATION The parties hereto may attempt to resolve any dispute hereunder informally via mediation or other means. Otherwise, any controversy or claim arising out of or relating to this Agreement, or any breach thereof, shall, except as provided in Paragraph 4, be adjudged only by arbitration in accordance with the rules of the American Arbitration Association, and judgment upon such award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration shall be held in the city of Houston, Texas, or such other place as may be agreed upon at the time by the parties to the arbitration. The arbitrator(s) shall, in their award, allocate between the parties the costs of arbitration, which shall include reasonable attorneys' fees of the parties, as well as the arbitrators' fees and expenses, in such proportions as the arbitrator(s) deem just; provided, however, notwithstanding the above, in the event you are the prevailing party, then the Company agrees to reimburse you for all such costs of arbitration, including, but not limited to, attorneys' fees and expenses reasonably incurred by you; provided further, notwithstanding the above, in the event the Company is the prevailing party, then the total costs of arbitration, including but not limited to attorneys' fees reasonably incurred by the Company and arbitrators' fees and expenses, that may be allocated to you by the arbitrator(s) shall not in any event exceed Twenty-Five Thousand Dollars ($25,000). Notwithstanding the 9 Mr. Stephen W. Bergstrom January 18 2000 Page 9 foregoing, you shall be entitled to seek specific performance in a court of competent jurisdiction of your right to be paid your full compensation until your separation from employment, during the pendency or dispute of any controversy arising under or in connection with this Agreement. 7. EXCISE TAXES (a) In the event that any payment or benefit received or to be received by you pursuant to the terms of this Agreement in connection with and contingent on the termination of your employment with the Company (the "Contract Payments") or of any other plan, arrangement or agreement of the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986 (as amended from time to time, the "Code") as determined as provided below, the Company shall pay to you, at the time specified in Section 7(b) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by you, after deduction of the Excise Tax on Payments and any federal, state and local income tax and the Excise Tax upon the Gross-Up Payment, and any interest, penalties or additions to tax payable by you with respect thereto, shall be equal to the total present value (using the applicable federal rate (as defined in Section 1274(d) of the Code in such calculation) of the Payments at the time such Payments are to be made. The Company shall have the right to make any such Gross-Up Payment, in whole or in part, in the form of a noncash payment of equal value (as determined by Independent Counsel) to that portion of the Gross-Up Payment had it been paid in cash. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of the Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent counsel selected by the Company and reasonably acceptable to you ("Independent Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of section 280G(b)(1) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit included in the Payments or Gross-Up Payment, as applicable, shall be determined by Independent Counsel in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation applicable to the individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of your residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. 10 Mr. Stephen W. Bergstrom January 18 2000 Page 10 (b) The Gross-Up Payments provided for in Paragraph 7(a) hereof shall be made upon the earlier of (i) the payment to you of any Payment or (ii) the imposition upon you or payment by you of any Excise Tax. (c) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Independent Counsel that the Excise Tax is less than the amount taken into account under Section 7(a) hereof, you shall repay to the Company within thirty (30) days of your receipt of notice of such final determination or opinion the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction) plus any interest received by you on the amount of such repayment. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Independent Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess within thirty (30) days of the Company's receipt of notice of such final determination or opinion. (d) In the event of any change in, or further interpretation of, sections 280G or 4999 of the Code and the regulations promulgated thereunder, you shall be entitled, by written notice to the Company, to request an opinion of Independent Counsel regarding the application of such change to any of the foregoing, and the Company shall use its best efforts to cause such opinion to be rendered as promptly as practicable. All fees and expenses of such Independent Counsel incurred in connection with this Agreement shall be borne by the Company. 8. OTHER PROVISIONS (a) THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICTS OF LAW, RULE OR PRINCIPLE THAT MIGHT OTHERWISE REFER TO THE SUBSTANTIVE LAW OF ANOTHER JURISDICTION. (b) Except as otherwise indicated, this Agreement is not assignable without the written authorization of both parties, provided that the Company may assign this Agreement to any entity to which the Company transfers substantially all of its assets or to any entity which is a successor to the Company by reorganization, incorporation, merger or similar business combination. (c) Except as otherwise provided herein, the provisions of Paragraphs 4, 5 and 6 of this Agreement shall survive the termination of this Agreement. (d) Except as otherwise provided in Paragraph 7 hereof, all payments to you under this Agreement will be subject to the withholding of all applicable employment taxes and income taxes; provided, however, that at your request the parties hereto will use reasonable efforts to explore alternatives to allow the Company to make charitable contributions on behalf 11 Mr. Stephen W. Bergstrom January 18 2000 Page 11 of the employee by redirecting a portion of your annual bonuses to charitable organization(s) chosen by you in accordance with Paragraph 3(b) of this Agreement. (e) This Agreement supersedes all previous employment agreements, written or oral, between the Company and you. This Agreement may be amended only by written amendment duly executed by both parties or their legal representatives and authorized by action of the Board of Directors. Except as otherwise specifically provided in this Agreement, no waiver by either party hereto of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a subsequent breach of such condition or provision or a waiver of a similar or dissimilar provision or condition at the same or at any prior or subsequent time. (f) Any notice or other communication required or permitted pursuant to the terms of this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States mail, first class, postage prepaid and registered with return receipt requested, addressed to the intended recipient at his or its address set forth below and, in the case of a notice or other communication to the Company, directed to the attention of the Board of Directors with a copy to the Secretary of the Company, or to such other address as the intended recipient may have theretofore furnished to the sender in writing in accordance herewith, except that until any notice of change of address is received, notices shall be sent to the following addresses: IF TO YOU IF TO THE COMPANY: Stephen W. Bergstrom Dynegy Inc. 21715 Chestnut Grove 1000 Louisiana, Suite 5800 Kingwood, TX 77345 Houston, TX 77002 Attn: Chief Executive Officer (g) If any one or more of the provisions or parts of a provision contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision or part of a provision of this Agreement, but this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision or part of a provision had never been contained herein and such provisions or part thereof shall be reformed so that it would be valid, legal and enforceable to the maximum extent permitted by law. (h) Neither you nor the Company will make or authorize any public statement disparaging the other in its or his business interests and affairs. Notwithstanding the foregoing, neither party shall be (i) required to make any statement which it or he believes to be false or inaccurate, or (ii) restricted in connection with any litigation, arbitration or similar proceeding or with respect to its response to any legal process. The provisions in this Paragraph 8(h) shall survive the termination of your employment hereunder, irrespective of the reason therefor. (i) The waiver by the Company of breach of any provision of this Agreement by you shall not operate or be construed as a waiver of any subsequent breach by you. The 12 Mr. Stephen W. Bergstrom January 18 2000 Page 12 waiver by you of a breach of any provision of this Agreement by the Company shall not operate or be construed as a waiver of any subsequent breach by the Company. (j) You shall not be required to mitigate damages (or the amount of any compensation provided under this Agreement to be paid) following your termination of employment, by seeking employment or otherwise. (k) If any provision of this Agreement as applied to either party or to any circumstances shall be adjudged by a court of competent jurisdiction to be void or unenforceable, the same shall in no way affect any other provision of this Agreement or the validity or enforceability of this Agreement. (l) The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. (m) This Agreement may be executed in one or more counterparts, which shall, collectively and separately, constitute one agreement. (n) Notwithstanding anything to the contrary set forth in this Agreement, the Company may cause any of its subsidiaries for which you render services to pay or otherwise satisfy, in whole or in part, some or all of the Company's obligations hereunder. 13 Mr. Stephen W. Bergstrom January 18 2000 Page 13 If the foregoing reflects your understanding of the terms of your employment with the Company, please execute each copy of this letter in the space provided below. DYNEGY INC. By: -------------------------------- Name: Charles L. Watson Title: Chairman & CEO AGREED AND ACCEPTED this _____ day of January, 2000 - ------------------------------- Stephen W. Bergstrom 14 EXECUTION COPY Bergstrom Employment Agreement - Schedule I EXECUTIVE PERQUISITES Except as provided below, as long as you remain in the employment of the Company during the Term of this Agreement, you will be entitled to the following: 1. Personal country club membership in Kingwood Country Club, including the reimbursement of all dues and business-related expenses. This membership shall be assigned to you in the event of termination of the Agreement for any reason, and you shall pay dues from the date of termination, but you shall not be obligated to reimburse the Company for any amounts paid by the Company prior to termination. Notwithstanding anything to the contrary in this Agreement or this Schedule, in no case shall the Company be obligated to pay any amount of dues, fees or reimbursement for or to any country club or luncheon club that, in the determination of the Board of Directors in its sole discretion, restricts membership or the performance of services or the use of facilities on the basis of race, religion, gender or national origin. 2. Personal membership in two (2) Houston luncheon clubs of your choice, including the reimbursement of all dues and business-related expenses. These memberships shall be assigned to you in the event of termination of the Agreement for any reason, and you shall pay dues from the date of termination, but you will not be obligated to reimburse the Company for any amounts paid by the Company prior to termination. 3. Vacations and holidays in accordance with the Company's policies in effect from time to time for its senior executive officers, but not less than six (6) weeks of vacation during each fiscal year. 4. A benefit package including medical, hospital, dental, disability and life insurance plans and coverage for you and your spouse and children at least as favorable to you (and your spouse and children) as that provided to you immediately prior to the commencement of the Term of this Agreement unless, with respect to any particular plan or coverage, the continuation of such existing plan or coverage would have material adverse financial or regulatory consequences to the Company. 5. Reimbursement of fees for annual medical physical examinations and for financial and/or federal income tax planning (and reasonable accounting and legal fees associated therewith), the allocable cost of which perquisites to you are not to exceed $25,000 annually. 6. Use of any aircraft owned or leased by the Company for Company business in accordance with the policies adopted by the Board of Directors, which policy is subject to the approval of the Board of Directors from time to time, You may also, in accordance with such policies, which shall not be amended as they apply to you without your prior consent, use any aircraft owned or leased by the Company for your own personal business; provided, however, that (i) such use does not adversely interfere with the use of such aircraft for Company business, (ii) you shall maintain any records reasonably requested by the Board of Directors, (iii) you shall compensate the Company for such use - EX-10.11 7 EMPLOYMENT AGREEMENT - JOHN U. CLARKE 1 EXHIBIT 10.11 January 11, 2000 Mr. John U. Clarke 6540 Rutgers Houston, Texas 77005 Dear John: Set forth below are the terms of your employment (the "Agreement") with Dynegy Inc. (hereinafter referred to as "Dynegy" or the "Company"). 1. TITLE AND DUTIES Your title shall be Executive Vice President. You will be responsible for the duties typical to such position and shall have such other duties as may be delegated from time to time by your immediate supervisor. You will be employed at Dynegy's headquarters in Houston, Texas. You shall devote your full time, energy and skill to the performance of your duties for Dynegy, and will exercise due diligence and reasonable care in the performance of such duties. During the Term (as defined below) of this Agreement, you shall report to the Company's Chief Executive Officer and be a member of the Company's Corporate Strategy and Policy Committee. The Company will take such action as may be required to facilitate your election as a non-voting Advisory Director of Dynegy. In addition, you will be permitted to participate in such other business, professional or charitable affiliations with the prior written approval of the Company's Chief Executive Officer. 2. TERM (a) Unless earlier terminated as provided for herein, the term of this Agreement will be for four (4) years, commencing on the Effective Date (as defined below) and ending on the fourth anniversary of the Effective Date (such period, as extended pursuant to the next succeeding sentence, if applicable, the "Term"). The Term shall automatically be extended for additional one (1) year periods unless either the Company or you provides written notice at least sixty (60) days prior to the date on which this Agreement would otherwise be automatically extended that such party is electing not to so extend the Term. The term "Effective Date" means 2 Mr. John U. Clarke January 11, 2000 Page 2 the date of the closing of the proposed merger of Dynegy Inc. and Illinova Corporation pursuant to that certain merger agreement dated as of June 14, 1999, as amended. (b) If your employment with Dynegy is terminated due to your voluntary resignation or by the Company for "cause", this Agreement shall terminate immediately (except for the confidentiality, non-competition and non-solicitation provisions of Paragraph 4 and the provisions of Paragraphs 5 and 6), and the Company shall have no further obligation to you except for the payment of amounts due before the date of such termination and except that you will be fully vested with regard to all stock options (irrespective of the date of the grant of such options and irrespective of the vesting schedule otherwise applicable to such options) granted to you hereunder as a signing bonus, as provided in Paragraph 3(d) below, and you shall be permitted to retain such options for future exercise or sell such stock received on exercise as though you had remained in the employment of the Company until the end of the Term. The Company shall take such actions as permitted by applicable law to cause such vesting and option retention. However, nothing in this Paragraph 2(b) shall require accelerated vesting or accelerated exercisability of any other stock options that may have been or may be granted to you unless otherwise expressly provided for herein. You further agree that the benefits which you have received from the execution of this Agreement through the date of such termination constitute sufficient consideration for your obligations pursuant to Paragraph 4, notwithstanding the fact that the Company has no further obligation to you except for the payment of amounts due before the date of such termination and except for you being fully vested with regard to all stock options (irrespective of the date of the grant of such options and irrespective of the vesting schedule otherwise applicable to such options) granted to you hereunder as a signing bonus, as provided in Paragraph 3(d) below, and you shall be permitted to retain such options for future exercise or sell such stock received on exercise as though you had remained in the employment of the Company until the end of the Term, and the Company shall take such actions as permitted by applicable law to cause such vesting and option retention. For purposes of this Agreement, you may be terminated for "cause" as a result of (i) your refusal to implement or adhere to lawful policies or lawful directives of the Board of Directors of Dynegy (the "Board of Directors") or your immediate supervisor; (ii) serious misconduct, dishonesty or disloyalty, directly related to the performance of your duties for the Company or gross negligence in the performance of your duties for the Company; (iii) your being convicted (or entering into a plea bargain admitting or not contesting criminal guilt) in any criminal felony proceeding; (iv) drug or alcohol abuse; (v) continued failure to perform your duties under this Agreement, which is not cured within ten (10) days after written notice of such failure is provided to you by Dynegy; or (vi) any other material breach of this Agreement by you that is not cured within ten (10) days after written notice of such breach is delivered to you from the Company. (c) If your employment is terminated during the Term of this Agreement due to resignation following "constructive termination" (as defined below) or for any other reason other than your voluntary resignation, death, disability or discharge for cause, you shall receive as your sole compensation in lieu of further payments to you pursuant to Paragraph 3 hereof: (i) a lump sum amount equal to the product of (x) 2.99 and (y) the greater of (a) the average annual Base Salary and incentive compensation, whether payable in cash or stock options, you were paid by the Company for the highest three (3) calendar years preceding the calendar year in which your 3 Mr. John U. Clarke January 11, 2000 Page 3 employment is terminated (or such shorter period as you have actually been employed by the Company), or (b) your Base Salary and target bonus amount for the year in which your employment is terminated; (ii) a lump sum amount equal to the net present value, as determined by the Board of Directors in its sole and absolute discretion, of the benefits to be provided to you in Paragraphs 3(f) and 3(g) of this Agreement and such other perquisites (if any) being provided to you on the date of your termination, as if you were still employed for the remainder of the Term of this Agreement, with regard to those benefits to be provided to you during the Term of this Agreement, and as if you had completed the Term of this Agreement with regard to those benefits to be provided to you upon completion of the Term of this Agreement; (iii) any employee stock options granted to you prior to or during the Term of this Agreement shall become vested as of the date of your resignation due to such constructive termination or discharge not for cause, and you shall have the right to exercise any such vested options through the end of the Term of this Agreement or one year from the date of termination, whichever is later; and (iv) for a period of thirty-six (36) months from the date of such termination, all health and welfare benefits the Company was maintaining for you and your family as of the date of such resignation or discharge. For purposes of this Agreement a "constructive termination" shall be deemed to have occurred in the event that: (i) your Base Salary as defined in Paragraph 3(a), bonus compensation under Paragraph 3(b), target range of annual option grants under Paragraph 3(c) or other compensation as described in Paragraphs 3(f) and 3(g) is reduced; (ii) a significant diminution in your responsibilities, authority or scope of duties is effected by the Board of Directors, and such diminution is made without your written consent (without regard to whether or not any change is made to your title); (iii) the Company materially breaches this Agreement; or (iv) the relocation of the Company's principal executive offices to a location, or the Company requires you to be based, outside a fifty (50) mile radius from the city limits of Houston, Texas. Any resignation by you as a result of assertion of a constructive termination shall be communicated by delivery to the Board of Directors within thirty (30) days from the commencement of such constructive termination by written notice setting forth the grounds therefor, during which period the Company shall be entitled to cure or remedy the matters set forth in such notice to your reasonable satisfaction. Unless you withdraw such notice prior to the expiration of such thirty-day (30) period, such resignation shall take effect upon the expiration of thirty (30) days from the date of the delivery of such notice. Any other resignation by you shall be communicated by thirty (30) days' advance written notice. (d) If you die, or become disabled and cannot perform your duties, your employment hereunder shall be terminated immediately (except that the confidentiality, noncompetition and nonsolicitation provisions of Paragraph 4 and the provisions of Paragraphs 5 and 6 shall survive the termination of your employment) and: (i) you (or your estate) shall be entitled to the Base Salary (as defined in Paragraph 3(a)) payable to you hereunder for twelve (12) months following the month in which you die or become disabled, plus the amount of any target bonus as described in Paragraph 3(b) for the year of death or disability, prorated for the portion of the twelve-month period (12) elapsed in which the death or disability occurs; (ii) you (or your estate) shall receive, for a period of twenty-four (24) months from the date of your death or disability, all health insurance and health benefits that the Company was maintaining for you 4 Mr. John U. Clarke January 11, 2000 Page 4 and/or your estate and for your family as of the date of your death or disability; and (iii) any employee stock options granted to you during the Term of this Agreement shall become vested as of the date of your death or disability on the same terms as provided for the vesting of stock options in Paragraph 2(c) above. For purposes of this Agreement, you shall be disabled as of the first date on which you become eligible to receive disability benefits under the Company's long-term disability plan (or Social Security disability benefits at a time when the Company does not maintain a long-term disability plan or such plan is not available to you). (e) Unless otherwise specified herein, all payments under this Agreement shall be paid in a lump sum, less applicable withholding taxes, within thirty (30) days following the date of your termination. 3. COMPENSATION (a) Each year during the Term hereof, you will be paid a base salary of $450,000 per annum ("Base Salary"), payable in accordance with the Company's payroll guidelines. Increases may be made to your Base Salary at the discretion of the Board of Directors based upon your individual performance. (b) You shall be a participant in the Company's Incentive Compensation Plan. As part of Dynegy's incentive compensation program, you will have the opportunity to earn a target bonus in an amount equal to 100% of your Base Salary and a maximum cash award in an amount equal to 200% of your Base Salary, dependent upon certain financial or performance objectives, determined in accordance with such program and by the Board of Directors. To the extent any incentive compensation in excess of the maximum cash amount referenced above is payable under the Incentive Compensation Plan in any year to you, the Company will pay you any such amounts in noncash equivalents (e.g., stock options or restricted securities of the Company) of equal value, as determined by the Board of Directors in its sole and absolute discretion, At your election, in lieu of paying you all or part of such incentive compensation bonus, the Company will allow you to direct that all or part of such incentive compensation shall be allocated by the Company to, or expended directly for, charitable contributions of your selection. (c) Upon the Effective Date, you shall receive an initial grant of stock options pursuant to the Company's Long Term Incentive Plan (the "LTIP") with a projected value equal to 270% of your Base Salary. These options are subject to the vesting, forfeiture and other terms and conditions of the LTIP. Each year during the Term of this Agreement, you will be eligible to receive stock option grants granted to an employee holding the position of "Executive Vice President" in accordance with the requirements and provisions of the LTIP. The current target range for annual option grants for your position is a median of 180% and a 75th percentile of 270% of your Base Salary. You recognize that any value of an award of "market" options under the LTIP is a projected value, which is subject to the future performance of the Company stock, and that there is no guarantee that the actual value of such options will achieve that value. "Projected Value" means that at the end of the five years from the date of grant, assuming an 5 Mr. John U. Clarke January 11, 2000 Page 5 increase in market price of 15% per annum during the five years, the stock option may be exercised to obtain the stated value in excess of the exercise price. (d) Upon the Effective Date, you will receive, as a signing bonus, (x) a cash payment in the amount of $500,000 and (y) a grant of discounted stock options under Dynegy's Market and Employee Equity Option Plan ("EEOP") with an immediate in-the-money value equal to $750,000, with one-third (1/3) of these options vesting on each of the first, second and third anniversary of the Effective Date. These options shall be subject to the forfeiture and other terms and conditions of the EEOP, except as provided in clause (b) of Paragraph 2 hereunder. You and the Company acknowledge and agree that: (i) as of the Effective Date, that certain Employment Agreement (as the same may have been amended, supplemented or modified from time to time, the "Employment Agreement"), dated as of April 8, 1997, between you and NGC Corporation, is hereby terminated and of no further force and effect and (ii) the payments granted to you pursuant to clauses (x) and (y) of this Paragraph 3(d) are in full satisfaction of all of the Company's remaining duties and obligations under the Employment Agreement. (e) Upon the Effective Date, any options granted to you prior to November 1, 1999 shall become vested. (f) You will be entitled to participate in Dynegy's benefits programs for senior management executives, including, without limitation, Dynegy's deferred compensation plan for executives. Without limiting the foregoing, you will be entitled to participate in such other plans and receive such other perquisites as the Board of Directors in its sole discretion determines, including, but not limited to, reserved parking, club memberships, use of aircraft owned or leased by the Company, annual physical examination, financial and/or federal income tax planning and tax return preparation, the allocable cost of which plans and perquisites to you are not to exceed $25,000 annually. Pursuant to the terms of Dynegy's vacation policy you will be entitled to four (4) weeks per year of paid vacation. (g) The Company will pay an additional $5,000 per year on your behalf to provide you with additional life insurance and disability coverage in excess of the death benefit or disability coverage under Dynegy's standard executive employee and benefit plans. You shall select such coverage and shall own the insurance policies providing such coverage. You will be responsible for coverage and effectiveness of the policies, the Company's only obligation being to pay such amounts. 4. CONFIDENTIALITY You recognize and acknowledge that: (a) You will have access to certain information concerning the Company that is confidential and proprietary and constitutes valuable and unique property of the Company. You agree that you will not at any time, either during or after your employment, disclose to others, use, copy or permit to be copied, except pursuant to your duties on behalf of the 6 Mr. John U. Clarke January 11, 2000 Page 6 Company or its successors, assigns or nominees, any secret or confidential information of the Company (whether or not developed by you) without the prior written consent of the Board of Directors. The term "secret or confidential information of the Company" (sometimes referred to herein as "Confidential Information") shall include, without limitation, the Company's plans, strategies, potential acquisitions, costs, prices, systems for buying, selling, and/or trading natural gas, natural gas liquids, crude oil, coal, and electricity, client lists, pricing policies, financial information, the names of and pertinent information regarding suppliers, computer programs, policy or procedure manuals, training and recruiting procedures, accounting procedures, the status and content of the Company's contracts with its suppliers or clients, or servicing methods and techniques at any time used, developed, or investigated by the Company, before or during your tenure of employment to the extent any of the foregoing are (i) not generally available to the public and (ii) maintained as confidential by the Company. You further agree to maintain in confidence any confidential information of third parties received as a result of your employment and duties with the Company. (b) At the termination of your employment, you will deliver to the Company, as determined appropriate by the Company, all correspondence, memoranda, notes, records, client lists, computer systems, programs, or other documents and all copies thereof made, composed or received by you, solely or jointly with others, and which are in your possession, custody or control at such date and which are related in any manner to the past, present or anticipated business of the Company. (c) To protect and safeguard the Company's trade secrets and Confidential Information and also the Company's goodwill with its suppliers and clients, for that period of time following the termination of your employment for any reason other than pursuant to Paragraph 2(c) (i.e., in the event of a termination pursuant to the first paragraph of Paragraph 2(c), the non-compete obligations of this Paragraph 4(c) shall terminate) hereof through the expiration of the Term or twenty-four (24) months from the date of termination, whichever is later, you will not, within a 50 mile radius of any location where the Company had an office at any time during the Term hereof or any location where a client or supplier of the Company (which is a material client or supplier at any time during the Term hereof) had an office at any time during the Term hereof, without the prior written consent of the Board of Directors, directly or indirectly, engage in or be interested in (as owner, partner, shareholder, employee, director, agent, consultant or otherwise), any business which is a competitor of the Company, as hereinafter defined. For purposes of this Agreement, a "competitor of the Company" is any entity, including, without limitation, a corporation, sole proprietorship, partnership, joint venture, syndicate, trust or any other form of organization or a parent, subsidiary or division of any of the foregoing, which, during such period or the immediately preceding fiscal year of such entity, was engaged in the unregulated marketing, gathering, transportation or processing of natural gas or derivatives of natural gas or other hydrocarbons or electricity. For purposes of this paragraph, the following entities shall not be deemed to be competitors of the Company: (i) a Local Distribution Company ("LDC") to the extent that any purchases or sales by such LDC are only for consumption on its system; (ii) a natural gas producer to the extent that such producer sells only its own production or production of other working interest owners in wells in which it owns an interest; (iii) a natural gas pipeline company in the jurisdictional aspects of its business, i.e., 7 Mr. John U. Clarke January II, 2000 Page 7 other than a nonjurisdictional marketing affiliate or production affiliate (except as to such production affiliate's own production as described in clause (ii) of this Paragraph 4(c)); or (iv) an integrated regulated electric and/or gas utility as long as such utility does not engage in the unregulated marketing of its generation or power trading other than that related to the generation or power marketing allocated to its own service areas. The terms of this Paragraph 4(c) shall not apply to your present or future investments in the securities of companies listed on a national securities exchange or traded on the over-the-counter market to the extent such investments do not exceed one percent (1%) of the total outstanding shares of such company. (d) For a period of twenty-four (24) months after the expiration or termination of your employment for whatever reason, other than pursuant to Paragraph 2(c) above or for a period of twelve months following the termination of your employment pursuant to Paragraph 2(c) above, you shall not solicit, raid, entice, encourage or induce any person who at the time of such expiration or termination of employment is an employee of the Company, or any of its subsidiaries or affiliated companies, to become employed by any person, firm or corporation, and you shall not approach any such employee for such purpose or authorize or knowingly approve the taking of such actions by any other person, firm or corporation or assist any such person, firm or corporation in taking such action. (e) You agree that the foregoing restrictions contain reasonable limitations as to the time, geographical area, and scope of activity to be restrained and that these restrictions do not impose any greater restraint than is necessary to protect the goodwill and other legitimate business interests of the Company, including, but not limited to, the protection of Confidential Information. You also agree that the general public shall not be harmed by enforcement of this Paragraph 4. Should any provision in this Paragraph 4 be held unreasonably broad with respect to the restrictions as to time, geographical area or scope of activity to be restrained, any such restriction shall be construed by limiting and reducing it to the extent necessary to render it reasonable, and as so construed, such provision shall be enforced. Accordingly, you consent and agree that if you violate any of the provisions of this Paragraph 4, the Company and its subsidiaries and affiliated companies would sustain irreparable harm and, therefore, in addition to any other remedies which the Company may have under this Agreement or otherwise, the Company shall be entitled to an injunction from any court of competent jurisdiction restraining you from committing or continuing any such violation of this Paragraph 4. You acknowledge that damages at law would not be an adequate remedy for violation of this Paragraph 4, and you therefore agree that the provisions of this Paragraph 4 may be specifically enforced against you in any court of competent jurisdiction. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to the Company for such breach or threatened breach, including the recovery of damages from you. 5. INDEMNIFICATION If, at any time during or after the Term of this Agreement, you are made a party to, or are threatened to be made a party in, any civil, criminal or administrative action, suit or proceeding by reason of the fact that you are or were a director, officer, employee or agent of the 8 Mr. John U. Clarke January 11, 2000 Page 8 Company, or of any other corporation or any partnership, joint venture, trust or other enterprise for which you served as such at the request of the Company, then you shall be indemnified by the Company, to the fullest extent permitted under applicable law, against expenses actually and reasonably incurred by you or imposed on you in connection with, or resulting from, the defense of such action, suit or proceeding, or in connection with, or resulting from, any appeal therein if you acted in good faith and in a manner you reasonably believed to be in or not opposed to the best interest of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe your conduct was unlawful, except with respect to matters as to which it is adjudged that you are liable to the Company or to such other corporation, partnership, joint venture, trust or other enterprise for gross negligence or willful misconduct in the performance of your duties. As used herein, the term "expenses" shall include all obligations actually and reasonably incurred by you for the payment of money, including, without limitation, attorney's fees, judgments, awards, fines, penalties and amounts paid in satisfaction of a judgment or in settlement of any such action, suit or proceeding, except amounts paid to the Company or such other corporation, partnership, joint venture, trust or other enterprise by you. The foregoing indemnification provisions shall be in addition to any other rights to indemnification to which you may be entitled. 6. ARBITRATION The parties hereto may attempt to resolve any dispute hereunder informally via mediation or other means. Otherwise, any controversy or claim arising out of or relating to this Agreement, or any breach thereof, shall, except as provided in Paragraph 4, be adjudged only by arbitration in accordance with the rules of the American Arbitration Association, and judgment upon such award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration shall be held in the city of Houston, Texas, or such other place as may be agreed upon at the time by the parties to the arbitration. The arbitrator(s) shall, in their award, allocate between the parties the costs of arbitration, which shall include reasonable attorneys' fees of the parties, as well as the arbitrators' fees and expenses, in such proportions as the arbitrator(s) deem just; provided, however, notwithstanding the above, in the event you are the prevailing party, then the Company agrees to reimburse you for all such costs of arbitration, including, but not limited to, attorneys' fees and expenses reasonably incurred by you; provided further, notwithstanding the above, in the event the Company is the prevailing party, then the total costs of arbitration, including but not limited to attorneys' fees reasonably incurred by the Company and arbitrators' fees and expenses, that may be allocated to you by the arbitrator(s) shall not in any event exceed Twenty-Five Thousand Dollars ($25,000). Notwithstanding the foregoing, you shall be entitled to seek specific performance in a court of competent jurisdiction of your right to be paid your full compensation until your separation from employment, during the pendency or dispute of any controversy arising under or in connection with this Agreement. 7. EXCISE TAXES (a) In the event that any payment or benefit received or to be received by you pursuant to the terms of this Agreement in connection with and contingent on the termination of your employment with the Company (the "Contract Payments") or of any other plan, 9 Mr. John U. Clarke January 11, 2000 Page 9 arrangement or agreement of the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986 (as amended from time to time, the "Code") as determined as provided below, the Company shall pay to you, at the time specified in Section 7(b) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by you, after deduction of the Excise Tax on Payments and any federal, state and local income tax and the Excise Tax upon the Gross-Up Payment, and any interest, penalties or additions to tax payable by you with respect thereto, shall be equal to the total present value (using the applicable federal rate (as defined in Section 1274(d) of the Code in such calculation) of the Payments at the time such Payments are to be made. The Company shall have the right to make any such Gross-Up Payment, in whole or in part, in the form of a noncash payment of equal value (as determined by Independent Counsel) to that portion of the Gross-Up Payment had it been paid in cash, For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of the Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent counsel selected by the Company and reasonably acceptable to you ("Independent Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of section 280G(b)(1) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit included in the Payments or Gross-Up Payment, as applicable, shall be determined by Independent Counsel in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation applicable to the individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of your residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. (b) The Gross-Up Payments provided for in Paragraph 7(a) hereof shall be made upon the earlier of (i) the payment to you of any Payment or (ii) the imposition upon you or payment by you of any Excise Tax. (c) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Independent Counsel that the Excise Tax is less than the amount taken into account under Section 7(a) hereof, you shall repay to the Company within thirty (30) days of your receipt of notice of such final determination or opinion the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed 10 Mr. John U. Clarke January 11, 2000 Page 10 on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction) plus any interest received by you on the amount of such repayment. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Independent Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess within thirty (30) days of the Company's receipt of notice of such final determination or opinion. (d) In the event of any change in, or further interpretation of, sections 280G or 4999 of the Code and the regulations promulgated thereunder, you shall be entitled, by written notice to the Company, to request an opinion of Independent Counsel regarding the application of such change to any of the foregoing, and the Company shall use its best efforts to cause such opinion to be rendered as promptly as practicable. All fees and expenses of such Independent Counsel incurred in connection with this Agreement shall be borne by the Company. 8. OTHER PROVISIONS (a) THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICTS OF LAW, RULE OR PRINCIPLE THAT MIGHT OTHERWISE REFER TO THE SUBSTANTIVE LAW OF ANOTHER JURISDICTION. (b) Except as otherwise indicated, this Agreement is not assignable without the written authorization of both parties, provided that the Company may assign this Agreement to any entity to which the Company transfers substantially all of its assets or to any entity which is a successor to the Company by reorganization, incorporation, merger or similar business combination. (c) Except as otherwise provided herein, the provisions of Paragraphs 4, 5 and 6 of this Agreement shall survive the termination of this Agreement. (d) Except as otherwise provided in Paragraph 7 hereof, all payments to you under this Agreement will be subject to the withholding of all applicable employment taxes and income taxes; provided, however, that at your request the parties hereto will use reasonable efforts to explore alternatives to allow the Company to make charitable contributions on behalf of the employee by redirecting a portion of your annual bonuses to charitable organization(s) chosen by you in accordance with Paragraph 3(b) of this Agreement. (e) This Agreement supersedes all previous employment agreements, written or oral, between the Company and you. This Agreement may be amended only by written amendment duly executed by both parties or their legal representatives and authorized by action of the Board of Directors. Except as otherwise specifically provided in this Agreement, no waiver by either party hereto of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a 11 Mr. John U. Clarke January 11, 2000 Page 11 subsequent breach of such condition or provision or a waiver of a similar or dissimilar provision or condition at the same or at any prior or subsequent time. (f) Any notice or other communication required or permitted pursuant to the terms of this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States mail, first class, postage prepaid and registered with return receipt requested, addressed to the intended recipient at his or its address set forth below and, in the case of a notice or other communication to the Company, directed to the attention of the Board of Directors with a copy to the Secretary of the Company, or to such other address as the intended recipient may have theretofore furnished to the sender in writing in accordance herewith, except that until any notice of change of address is received, notices shall be sent to the following addresses: IF TO YOU: IF TO THE COMPANY: John U. Clarke Dynegy Inc. 6540 Rutgers 1000 Louisiana, Suite 5800 Houston, TX 77005 Houston, TX 77002 Attn: Chief Executive Officer (g) If any one or more of the provisions or parts of a provision contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision or part of a provision of this Agreement, but this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision or part of a provision had never been contained herein and such provisions or part thereof shall be reformed so that it would be valid, legal and enforceable to the maximum extent permitted by law. (h) Neither you nor the Company will make or authorize any public statement disparaging the other in its or his business interests and affairs. Notwithstanding the foregoing, neither party shall be (i) required to make any statement which it or he believes to be false or inaccurate, or (ii) restricted in connection with any litigation, arbitration or similar proceeding or with respect to its response to any legal process. The provisions in this Paragraph 8(h) shall survive the termination of your employment hereunder, irrespective of the reason therefor. (i) The waiver by the Company of breach of any provision of this Agreement by you shall not operate or be construed as a waiver of any subsequent breach by you. The waiver by you of a breach of any provision of this Agreement by the Company shall not operate or be construed as a waiver of any subsequent breach by the Company. (j) You shall not be required to mitigate damages (or the amount of any compensation provided under this Agreement to be paid) following your termination of employment, by seeking employment or otherwise. 12 Mr. John U. Clarke January 11, 2000 Page 12 (k) If any provision of this Agreement as applied to either party or to any circumstances shall be adjudged by a court of competent jurisdiction to be void or unenforceable, the same shall in no way affect any other provision of this Agreement or the validity or enforceability of this Agreement. (l) The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. (m) This Agreement may be executed in one or more counterparts, which shall, collectively and separately, constitute one agreement. (n) Notwithstanding anything to the contrary set forth in this Agreement, the Company may cause any of its subsidiaries for which you render services to pay or otherwise satisfy, in whole or in part, some or all of the Company's obligations hereunder. 13 Mr. John U. Clarke January 11, 2000 Page 13 If the foregoing reflects your understanding of the terms of your employment with the Company, please execute each copy of this letter in the space provided below. DYNEGY INC. By: --------------------------------- Name: Charles L. Watson Title: Chairman & CEO AGREED AND ACCEPTED this day of January, 2000 ----- - -------------------------------- John U. Clarke EX-10.12 8 EMPLOYMENT AGREEMENT - KENNETH E. RANDOLPH 1 EXECUTION COPY EXHIBIT 10.12 January 11, 2000 Kenneth E. Randolph 9537 Bayou Brook Houston, TX 77063 Dear Ken: Set forth below are the terms of your employment (the "Agreement") with Dynegy Inc. (hereinafter referred to as "Dynegy" or the "Company"). 1. TITLE AND DUTIES Your title shall be General Counsel. You will be responsible for Legal, Regulatory and Legislative Affairs and shall have such other duties as may be delegated from time to time by your immediate supervisor. You will be employed at Dynegy's headquarters in Houston, Texas. You shall devote your full time, energy and skill to the performance of your duties for Dynegy, and will exercise due diligence and reasonable care in the performance of such duties. During the Term (as defined below) of this Agreement, you shall report to the Company's Chief Executive Officer. 2. TERM (a) Unless earlier terminated as provided for herein, the term of this Agreement will be for two (2) years, beginning on the Effective Date and ending on the second anniversary of the Effective Date (such period, as extended pursuant to the next succeeding sentence, if applicable, the "Term"). The Term shall automatically be extended for additional one (1) year periods unless either the Company or you provides written notice at least sixty (60) days prior to the date on which this Agreement would otherwise be automatically extended that such party is electing not to so extend the Term. The term "Effective Date" means the date of closing of the proposed merger of Dynegy Inc. and Illinova Corporation pursuant to that certain Merger Agreement dated as of June 14, 1999, as amended. (b) If your employment with Dynegy is terminated due to your voluntary resignation or by the Company for "cause", this Agreement shall terminate immediately (except for the confidentiality, non-competition and non-solicitation provisions of Paragraph 4 and the 2 Kenneth E. Randolph January 11, 2000 Page 2 provisions of Paragraphs 5 and 6), and the Company shall have no further obligation to you except for the payment of amounts due before the date of such termination. You further agree that the benefits which you have received from the execution of this Agreement through the date of such termination constitute sufficient consideration for your obligations pursuant to Paragraph 4, notwithstanding the fact that the Company has no further obligation to you except for the payment of amounts due before the date of such termination. For purposes of this Agreement, you may be terminated for "cause" as a result of (i) your refusal to implement or adhere to lawful policies or lawful directives of the Board of Directors of Dynegy (the "Board of Directors") or your immediate supervisor; (ii) serious misconduct, dishonesty or disloyalty, directly related to the performance of your duties for the Company or gross negligence in the performance of your duties for the Company; (iii) your being convicted (or entering into a plea bargain admitting or not contesting criminal guilt) in any criminal felony proceeding; (iv) drug or alcohol abuse; (v) continued failure to perform your duties under this Agreement which is not cured within ten (10) days after written notice of such failure is provided to you by Dynegy; or (vi) any other material breach of this Agreement by you that is not cured within ten (10) days after written notice of such breach is delivered to you from the Company. (c) If your employment is terminated during the Term of this Agreement due to resignation following "constructive termination" (as defined below) or for any other reason other than your voluntary resignation, death, disability, or discharge for cause, you shall receive as your sole compensation in lieu of further payments to you pursuant to Paragraph 3 hereof: (i) a lump sum amount equal to the product of (x) 2.99 and (y) the greater of (a) the average annual Base Salary and incentive compensation, whether payable in cash or stock options, you were paid by the Company for the highest three (3) calendar years preceding the calendar year in which your employment is terminated (or such shorter period as you have actually been employed by the Company), or (b) your Base Salary and target bonus amount for the year in which your employment is terminated; (ii) a lump sum amount equal to the net present value, as determined by the Board of Directors in its sole and absolute discretion, of the benefits to be provided to you in Paragraphs 3(e) and 3(f) of this Agreement and such other perquisites (if any) being provided to you on the date of your termination, as if you were still employed for the remainder of the Term of this Agreement, with regard to those benefits to be provided to you during the Term of this Agreement, and as if you had completed the Term of this Agreement with regard to those benefits to be provided to you upon completion of the Term of this Agreement; (iii) any employee stock options granted to you prior to or during the Term of this Agreement shall become vested as of the date of your resignation due to such constructive termination or discharge not for cause, and you shall have the right to exercise any such vested options through the end of the Term of this Agreement or one year from the date of termination, whichever is later; and (iv) for a period of thirty-six (36) months from the date of such termination, all health and welfare benefits the Company was maintaining for you and your family as of the date of such resignation or discharge. For purposes of this Agreement a "constructive termination" shall be deemed to have occurred in the event that: (i) your Base Salary as defined in Paragraph 3(a), bonus compensation under Paragraph 3(b), target range of annual option grants under Paragraph 3(c) 3 Kenneth E. Randolph January 11, 2000 Page 3 or other compensation as described in Paragraphs 3(e) and 3(f) is reduced; (ii) a significant diminution in your responsibilities, authority or scope of duties is effected by the Board of Directors, and such diminution is made without your written consent (without regard to whether or not any change is made to your title); (iii) the Company materially breaches this Agreement; or (iv) the relocation of the Company's principal executive offices to a location, or the Company requires you to be based, outside a fifty (50) mile radius from the city limits of Houston, Texas. Any resignation by you as a result of assertion of a constructive termination shall be communicated by delivery to the Board of Directors within thirty (30) days from the commencement of such constructive termination by written notice setting forth the grounds therefor, during which period the Company shall be entitled to cure or remedy the matters set forth in such notice to your reasonable satisfaction. Unless you withdraw such notice prior to the expiration of such thirty-day (30) period, such resignation shall take effect upon the expiration of thirty (30) days from the date of the delivery of such notice. Any other resignation by you shall be communicated by thirty (30) days' advance written notice. (d) If you die, or become disabled and cannot perform your duties, your employment hereunder shall be terminated immediately (except that the confidentiality, noncompetition and nonsolicitation provisions of Paragraph 4 and the provisions of Paragraphs 5 and 6 shall survive the termination of your employment) and: (i) you (or your estate) shall be entitled to the Base Salary (as defined in Paragraph 3(a)) payable to you hereunder for twelve (12) months following the month in which you die or become disabled, plus the amount of any target bonus as described in Paragraph 3(b) for the year of death or disability, prorated for the portion of the twelve-month period (12) elapsed in which the death or disability occurs; (ii) you (or your estate) shall receive, for a period of twenty-four (24) months from the date of your death or disability, all health insurance and health benefits that the Company was maintaining for you and/or your estate and for your family as of the date of your death or disability; and (iii) any employee stock options granted to you during the Term of this Agreement shall become vested as of the date of your death or disability on the same terms as provided for the vesting of stock options in Paragraph 2(c) above. For purposes of this Agreement, you shall be disabled as of the first date on which you become eligible to receive disability benefits under the Company's long-term disability plan (or Social Security disability benefits at a time when the Company does not maintain a long-term disability plan or such plan is not available to you). (e) Unless otherwise specified herein, all payments under this Agreement shall be paid in a lump sum, less applicable withholding taxes, within thirty (30) days following the date of your termination. 3. COMPENSATION (a) Each year during the Term hereof, you will be paid a base salary of $350,000 per annum ("Base Salary"), payable in accordance with the Company's payroll guidelines. Increases may be made to your Base Salary at the discretion of the Board of Directors based upon your individual performance. 4 Kenneth E. Randolph January 11, 2000 Page 4 (b) You shall be a participant in the Company's Incentive Compensation Plan. As part of Dynegy's incentive compensation program, you will have the opportunity to earn a target bonus in an amount equal to 100% of your Base Salary and a maximum cash award in an amount equal to 200% of your Base Salary, dependent upon certain financial or performance objectives, determined in accordance with such program and by the Board of Directors. To the extent any incentive compensation in excess of the maximum cash amount referenced above is payable under the Incentive Compensation Plan in any year to you, the Company will pay you any such amounts in noncash equivalents (e.g., stock options or restricted securities of the Company) of equal value, as determined by the Board of Directors in its sole and absolute discretion. At your election, in lieu of paying you all or part of such incentive compensation bonus, the Company will allow you to direct that all or part of such incentive compensation shall be allocated by the Company to, or expended directly for, charitable contributions of your selection. (c) Upon the Effective Date, you will receive (x) stock option grants pursuant to the Company's Long-Term Incentive Plan ("LTIP") with a projected value equal to 225% of your Base Salary and (y) discounted stock option grants under the Employee Equity Option Plan ("EEOP"; and, together with LTIP, the "Stock Option Plans") with an in-the-money value equal to $250,000. Your EEOP options shall become 40% vested and exercisable on the second anniversary of the Effective Date provided you are employed by the Company on such date. The aforementioned options will vest in accordance with the vesting provisions of each of the Stock Option Plans. Each year during the Term of this Agreement, you will be eligible to receive stock option grants in accordance with the requirements and provisions of the Company's LTIP. The current target range for annual option grants for your position is a median of 150% and a 75th percentile of 225% of your Base Salary. You recognize that any value of an award of "market" options under the LTIP is a projected value, which is subject to the future performance of the Company stock, and that there is no guarantee that the actual value of such options will achieve that value. "Projected Value" means that at the end of the five years from the date of grant, assuming an increase in market price of 15% per annum during the five years, the stock option may be exercised to obtain the stated value in excess of the exercise price. These options are subject to the vesting, forfeiture and other terms and conditions of the respective Stock Option Plan, except as specifically provided to the contrary in this Agreement. (d) Upon the Effective Date, any EEOP or other options granted to you prior to November 1,1999 shall become vested. (e) You will be entitled to participate in Dynegy's benefits programs for senior management executives, including, without limitation, Dynegy's deferred compensation plan for executives. Without limiting the foregoing, you will be entitled to participate in such other plans and receive such other perquisites as the Board of Directors in its sole discretion determines, including, but not limited to, reserved parking, club memberships, use of aircraft owned or leased by the Company, annual physical examination, financial and/or federal income tax planning and tax return preparation, the allocable cost of which plans and perquisites to you are not to exceed $25,000 annually. Pursuant to the terms of Dynegy's vacation policy you will be entitled to four (4) weeks per year of paid vacation. 5 Kenneth E. Randolph January 11, 2000 Page 5 (f) The Company will pay an additional $5,000 per year on your behalf to provide you with additional life insurance and disability coverage in excess of the death benefit or disability coverage under Dynegy's standard executive employee and benefit plans. You shall select such coverage and shall own the insurance policies providing such coverage. You will be responsible for coverage and effectiveness of the policies, the Company's only obligation being to pay such amounts. (g) Upon the Effective Date, the Company shall pay you a signing bonus in the amount of $100,000. You and the Company acknowledge and agree that: (i) as of the Effective Date, that certain Employment Agreement (as the same may have been amended, modified or supplemented from time to time, the "Employment Agreement"), dated as of January 1, 1997, between you and NGC Corporation, is hereby terminated and of no further force and effect and (ii) the payment granted to you pursuant to this Paragraph 3(g) is in full satisfaction of all of the Company's remaining duties and obligations under the Employment Agreement. 4. CONFIDENTIALITY/NONCOMPETE/NONSOLICITATION You recognize and acknowledge that: (a) You will have access to certain information concerning the Company that is confidential and proprietary and constitutes valuable and unique property of the Company. You agree that you will not at any time, either during or after your employment, disclose to others, use, copy or permit to be copied, except pursuant to your duties on behalf of the Company or its successors, assigns or nominees, any secret or confidential information of the Company (whether or not developed by you) without the prior written consent of the Board of Directors of the Company. The term "secret or confidential information of the Company" (sometimes referred to herein as "Confidential Information") shall include, without limitation, the Company's plans, strategies, potential acquisitions, costs, prices, systems for buying, selling, and/or trading natural gas, natural gas liquids, crude oil, coal, and electricity, client lists, pricing policies, financial information, the names of and pertinent information regarding suppliers, computer programs, policy or procedure manuals, training and recruiting procedures, accounting procedures, the status and content of the Company's contracts with its suppliers or clients, or servicing methods and techniques at any time used, developed, or investigated by the Company, before or during your tenure of employment to the extent any of the foregoing are (i) not generally available to the public and (ii) maintained as confidential by the Company. You further agree to maintain in confidence any confidential information of third parties received as a result of your employment and duties with the Company. (b) At the termination of your employment you will deliver to the Company, as determined appropriate by the Company, all correspondence, memoranda, notes, records, client lists, computer systems, programs, or other documents and all copies thereof made, composed or received by you, solely or jointly with others, and which are in your possession, custody, or control at such date and which are related in any manner to the past, present, or anticipated business of the Company. 6 Kenneth E. Randolph January 11, 2000 Page 6 (c) To protect and safeguard the Company's trade secrets and Confidential Information and also the Company's goodwill with its suppliers and clients, for that period of time following the termination of your employment for any reason other than pursuant to Paragraph 2(c) above (i.e., in the event of a termination pursuant to the first paragraph of Paragraph 2(c), the non-compete obligations of this Paragraph 4(c) shall terminate) through the expiration of the Term, you will not, within a 50 mile radius of any location where the Company had an office at any time during the Term hereof or any location where a client or supplier of the Company (which is a material client or supplier at any time during the Term hereof) had an office at any time during the Term hereof, without the prior written consent of the Board of Directors of the Company, directly or indirectly, engage in or be interested in (as owner, partner, shareholder, employee, director, agent, consultant or otherwise), any business which is a competitor of the Company, as hereinafter defined. For purposes of this Agreement, a "competitor of the Company" is any entity, including, without limitation, a corporation, sole proprietorship, partnership, joint venture, syndicate, trust or any other form of organization or a parent, subsidiary or division of any of the foregoing, which, during such period or the immediately preceding fiscal year of such entity, was engaged in the unregulated marketing, gathering, transportation or processing of natural gas or derivatives of natural gas or other hydrocarbons or electricity. For purposes of this paragraph, the following entities shall not be deemed to be competitors of the Company: (i) a Local Distribution Company ("LDC") to the extent that any purchases or sales by such LDC are only for consumption on its system; (ii) a natural gas producer to the extent that such producer sells only its own production or production of other working interest owners in wells in which it owns an interest; (iii) a natural gas pipeline company in the jurisdictional aspects of its business, i.e., other than a nonjurisdictional marketing affiliate or production affiliate (except as to such production affiliate's own production as described in clause (ii) of this Paragraph 4(c)); or (iv) an integrated regulated electric and/or gas utility as long as such utility does not engage in the unregulated marketing of its generation or power trading other than that related to the generation or power marketing allocated to its own service areas. The terms of this Paragraph 4(c) shall not apply to your present or future investments in the securities of companies listed on a national securities exchange or traded on the over-the-counter market to the extent such investments do not exceed one percent (1%) of the total outstanding shares of such company. (d) For a period of twenty-four (24) months after the expiration or termination of your employment for whatever reason other than pursuant to Paragraph 2(c) above or for a period of twelve months following the termination of your employment pursuant to Paragraph 2(c) above, you shall not solicit, raid, entice, encourage or induce any person who at the time of such expiration or termination of employment is an employee of the Company, or any of its subsidiaries or affiliated companies, to become employed by any person, firm or corporation, and you shall not approach any such employee for such purpose or authorize or knowingly approve the taking of such actions by any other person, firm or corporation or assist any such person, firm or corporation in taking such action. (e) You agree that the foregoing restrictions contain reasonable limitations as to the time, geographical area and scope of activity to be restrained and that these restrictions do not impose any greater restraint than is necessary to protect the goodwill and other legitimate 7 Kenneth E. Randolph January 11, 2000 Page 7 business interests of the Company, including, but not limited to, the protection of Confidential Information. You also agree that the general public shall not be harmed by enforcement of this Paragraph 4. Should any provision in this Paragraph 4 be held unreasonably broad with respect to the restrictions as to time, geographical area, or scope of activity to be restrained, any such restriction shall be construed by limiting and reducing it to the extent necessary to render it reasonable, and as so construed, such provision shall be enforced. Accordingly, you consent and agree that if you violate any of the provisions of this Paragraph 4, the Company and its subsidiaries and affiliated companies would sustain irreparable harm and, therefore, in addition to any other remedies which the Company may have under this Agreement or otherwise, the Company shall be entitled to an injunction from any court of competent jurisdiction restraining you from committing or continuing any such violation of this Paragraph 4. You acknowledge that damages at law would not be an adequate remedy for violation of this Paragraph 4, and you therefore agree that the provisions of this Paragraph 4 may be specifically enforced against you in any court of competent jurisdiction. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to the Company for such breach or threatened breach, including the recovery of damages from you. 5. INDEMNIFICATION If, at any time during or after the Term of this Agreement, you are made a party to, or are threatened to be made a party in, any civil, criminal or administrative action, suit or proceeding by reason of the fact that you are or were a director, officer, employee, or agent of the Company, or of any other corporation or any partnership, joint venture, trust or other enterprise for which you served as such at the request of the Company, then you shall be indemnified by the Company, to the fullest extent permitted under applicable law, against expenses actually and reasonably incurred by you or imposed on you in connection with, or resulting from, the defense of such action, suit or proceeding, or in connection with, or resulting from, any appeal therein if you acted in good faith and in a manner you reasonably believed to be in or not opposed to the best interest of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe your conduct was unlawful, except with respect to matters as to which it is adjudged that you are liable to the Company or to such other corporation, partnership, joint venture, trust or other enterprise for gross negligence or willful misconduct in the performance of your duties. As used herein, the term "expenses" shall include all obligations actually and reasonably incurred by you for the payment of money, including, without limitation, attorney's fees, judgments, awards, fines, penalties and amounts paid in satisfaction of a judgment or in settlement of any such action, suit or proceeding, except amounts paid to the Company or such other corporation, partnership, joint venture, trust or other enterprise by you. The foregoing indemnification provisions shall be in addition to any other rights to indemnification to which you may be entitled. 6. ARBITRATION The parties hereto may attempt to resolve any dispute hereunder informally via mediation or other means. Otherwise, any controversy or claim arising out of or relating to this Agreement, or any breach thereof, shall, except as provided in Paragraph 4, be adjudged only by 8 Kenneth E. Randolph January 11, 2000 Page 8 arbitration in accordance with the rules of the American Arbitration Association, and judgment upon such award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration shall be held in the city of Houston, Texas, or such other place as may be agreed upon at the time by the parties to the arbitration. The arbitrator(s) shall, in their award, allocate between the parties the costs of arbitration, which shall include reasonable attorneys' fees of the parties, as well as the arbitrators' fees and expenses, in such proportions as the arbitrator(s) deem just; provided however, notwithstanding the above, in the event you are the prevailing party, then the Company agrees to reimburse you for all such costs of arbitration, including, but not limited to attorneys' fees and expenses reasonably incurred by you; provided further, notwithstanding the above, in the event the Company is the prevailing party, then the total costs of arbitration, including but not limited to attorneys' fees reasonably incurred by the Company and arbitrators' fees and expenses, that may be allocated to you by the arbitrator(s) shall not in any event exceed Twenty-Five Thousand Dollars ($25,000). Notwithstanding the foregoing, you shall be entitled to seek specific performance in a court of competent jurisdiction of your right to be paid your full compensation until your separation from employment, during the pendency or dispute of any controversy arising under or in connection with this Agreement. 7. OTHER PROVISIONS (a) THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICTS OF LAW, RULE OR PRINCIPLE THAT MIGHT OTHERWISE REFER TO THE SUBSTANTIVE LAW OF ANOTHER JURISDICTION. (b) Except as otherwise indicated, this Agreement is not assignable without the written authorization of both parties; provided that the Company may assign this Agreement to any entity to which the Company transfers substantially all of its assets or to any entity which is a successor to the Company by reorganization, incorporation, merger or similar business combination. (c) Except as otherwise provided herein, the provisions of Paragraphs 4, 5 and 6 of this Agreement shall survive the termination of this Agreement. (d) All payments to you under this Agreement will be subject to the withholding of all applicable employment taxes and income taxes; provided, however, that at your request the parties hereto will use reasonable efforts to explore alternatives to allow the Company to make charitable contributions on behalf of the employee by redirecting a portion of your annual bonuses to charitable organization(s) chosen by you in accordance with Paragraph 3(b) of this Agreement. (e) This Agreement supersedes all previous employment agreements, written or oral, between the Company and you. This Agreement may be amended only by written amendment duly executed by both parties or their legal representatives and authorized by action of the Board of Directors. Except as otherwise specifically provided in this Agreement, no waiver by either party hereto of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a 9 Kenneth E. Randolph January 11, 2000 Page 9 subsequent breach of such condition or provision or a waiver of a similar or dissimilar provision or condition at the same or at any prior or subsequent time. (f) Any notice or other communication required or permitted pursuant to the terms of this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States mail, first class, postage prepaid and registered with return receipt requested, addressed to the intended recipient at his or its address set forth below and, in the case of a notice or other communication to the Company, directed to the attention of the Board of Directors with a copy to the Secretary of the Company, or to such other address as the intended recipient may have theretofore furnished to the sender in writing in accordance herewith, except that until any notice of change of address is received, notices shall be sent to the following addresses: IF TO YOU: IF TO THE COMPANY: Kenneth E. Randolph Dynegy Inc. 9537 Bayou Brook 1000 Louisiana, Suite 5800 Houston, TX 77063 Houston, TX 77002 Attn: Chief Executive Officer (g) If any one or more of the provisions or parts of a provision contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision or part of a provision of this Agreement, but this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision or part of a provision had never been contained herein and such provisions or part thereof shall be reformed so that it would be valid, legal and enforceable to the maximum extent permitted by law. (h) Neither you nor the Company will make or authorize any public statement disparaging the other in its or his business interests and affairs. Notwithstanding the foregoing, neither party shall be (i) required to make any statement which it or he believes to be false or inaccurate, or (ii) restricted in connection with any litigation, arbitration or similar proceeding or with respect to its response to any legal process. The provisions in this Paragraph 7(h) shall survive the termination of your employment hereunder, irrespective of the reason therefor. (i) The waiver by the Company of breach of any provision of this Agreement by you shall not operate or be construed as a waiver of any subsequent breach by you. The waiver by you of a breach of any provision of this Agreement by the Company shall not operate or be construed as a waiver of any subsequent breach by the Company. (j) You shall not be required to mitigate damages (or the amount of any compensation provided under this Agreement to be paid) following your termination of employment, by seeking employment or otherwise. (k) If any provision of this Agreement as applied to either party or to any circumstances shall be adjudged by a court of competent jurisdiction to be void or unenforceable, 10 Kenneth E. Randolph January 11, 2000 Page 10 the same shall in no way affect any other provision of this Agreement or the validity or enforceability of this Agreement. (l) The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. (m) This Agreement may be executed in one or more counterparts, which shall, collectively and separately, constitute one agreement. (n) Notwithstanding anything to the contrary set forth in this Agreement, the Company may cause any of its subsidiaries for which you render services to pay or otherwise satisfy, in whole or in part, some or all of the Company's obligations hereunder. 11 Kenneth E. Randolph January 11, 2000 Page 11 If the foregoing reflects your understanding of the terms of your employment with the Company, please execute each copy of this letter in the space provided below. DYNEGY INC. By: ---------------------------------- Name: Charles L. Watson Title: Chairman & CEO AGREED AND ACCEPTED this ____ day of January, 2000 - ---------------------------- Kenneth E. Randolph EX-10.57 9 4TH AMEND. TO PROFIT SHARING/401(K) SAVINGS PLAN 1 EXHIBIT 10.57 FOURTH AMENDMENT TO DYNEGY INC. PROFIT SHARING/401(k) SAVINGS PLAN WHEREAS, Dynegy Inc. (the "Company") and other Employers have heretofore adopted the Dynegy Inc. Profit Sharing/401(k) Savings Plan (the "Plan") for the benefit of their eligible employees; and WHEREAS, the Company amended and restated the Plan on behalf of itself and the other Employers, effective as of January 1, 1998; and WHEREAS, the Company desires to further amend the Plan on behalf of itself and the other Employers; NOW, THEREFORE, the Plan shall be amended as follows: I. Effective as of January 1, 1998: 1. Section 3.1(e) of the Plan shall be amended by adding the following sentence immediately following the first sentence of such Paragraph: "For Plan Years beginning on or after January 1, 1997, such testing shall utilize the current year testing method as such term is defined in Internal Revenue Service Notice 98-1." 2. Section 3.5 of the Plan shall be amended by adding the following sentence immediately following the second sentence of such Paragraph: "'Qualified matching contributions' may be contributed to the Plan under the preceding sentence for purposes of satisfying the restrictions set forth in Section 3.1(e) only if the conditions described in Treasury regulation Section 1.401(k)-1(b)(5) are satisfied." 3. The second sentence of Section 3.6 of the Plan shall be deleted and the following shall be substituted therefor: "For Plan Years beginning on or after January 1, 1997, such testing shall utilize the current year testing method as such term is defined in Internal Revenue Service Notice 98-1. The Committee may elect, in accordance with applicable Treasury regulations, to treat Before-Tax Contributions to the Plan as Employer Matching Contributions for purposes of meeting this requirement only if the conditions described in Treasury regulation Section 1.401(m)-1(b)(5) are satisfied." 4. Clause (A) of Section 4.5(a)(3) of the Plan shall be deleted and the following shall be substituted therefor: "(A) $30,000 (with such amount to be adjusted automatically from and after January 1, 1995, to reflect any cost-of-living adjustment authorized by section 415(d) of the Code)" 2 5. Section 4.5(a)(4) of the Plan shall be deleted and the following shall be substituted therefor: "(4)" '415 Compensation' shall mean the total of all amounts paid by the Employer to or for the benefit of a Member for services rendered or labor performed for the Employer which are required to be reported on the Member's federal income tax withholding statement or statements (Form W-2 or its subsequent equivalent), subject to the following adjustments and limitations: (A) The following shall be included: (i) Elective deferrals (as defined in section 402(g)(3) of the Code) from compensation to be paid by the Employer to the Member; (ii) Any amount which is contributed or deferred by the Employer at the election of the Member and which is not includible in the gross income of the Member by reason of section 125 or 457 of the Code; and (iii) Any amounts that are not includable in the gross income of the Member under a salary reduction agreement by reason of the application of section 132(f) of the Code. (B) The 415 Compensation of any Member taken into account for purposes of the Plan shall be limited to $160,000 for any Plan Year with such limitation to be: (i) Adjusted automatically to reflect any amendments to section 401(a)(17) of the Code and any cost-of-living increases authorized by section 401(a)(17) of the Code; and (ii) Prorated for a Plan Year of less than twelve months and to the extent otherwise required by applicable law." 6. Section 12.5(c) of the Plan shall be deleted and the following shall be substituted therefor: "(c) If the Member fails in any way to comply with the repayment terms of a loan, such loan shall be repaid by offsetting the Member's outstanding loan balance (including interest) against the amount in the Member's segregated loan fund pledged as security for the loan. Any such outstanding loan (including interest) shall be so offset and repaid on the earlier of (a) the last day of the Grace Period (as hereinafter defined) applicable with respect to such failure to comply or (b) the date of any withdrawal or distribution of benefits from the pledged portion of the Member's Accounts pursuant to the provisions of the Plan. Notwithstanding the foregoing, amounts in a Member's Accounts may not be offset and used to satisfy the payment of such loan (including interest) prior to the earliest time such amounts would otherwise be permitted to be distributed under applicable law. For purposes 3 of this Paragraph, the 'Grace Period' with respect to any failure to comply with the repayment terms of a loan shall be the 90-day period beginning on the date of such failure." 7. Section 15.5(a) of the Plan shall be deleted and the following shall be substituted therefor: "(a) The investment manager is (1) registered as an investment adviser under the Investment Advisers Act of 1940, (2) not registered as an investment adviser under such act by reason of paragraph (1) of section 203A of such act, is registered as an investment adviser under the laws of the state (referred to in such paragraph (1)) in which it maintains its principal office and place of business, and, at the time it last filed the registration form most recently filed by it with such state in order to maintain its registration under the laws of such state, also filed a copy of such form with the Secretary of Labor, (3) a bank, as defined in the Investment Advisers Act of 1940, or (4) an insurance company qualified to do business under the laws of more than one state; and" 8. The phrase "and certain judgments and settlements" shall be added after the phrase "qualified domestic relations orders" in the first sentence of Section 19.2 of the Plan. 9. The following sentence shall be added to the end of Section 20.3(b) of the Plan: "If the Plan is deemed to be top-heavy for a Plan Year and the requirements of section 416(h)(2) of the Code are not satisfied, then the defined benefit and defined contribution plan fractions (as such terms are defined in section 415(e) of the Code) shall be computed by substituting '1.0' for '1.25' to the extent required by sections 416(h) and 415(e) of the Code." II. Effective as of January 1, 2000: 1. The following sentence shall be added to the end of Section 1.1(29) of the Plan: "Further, a distribution from the Before-Tax Account of a Member who has not attained age 59 1/2 pursuant to Section 11.1(c) shall not constitute an Eligible Rollover Distribution." 2. Section 11.2(e) of the Plan shall be deleted and the following shall be substituted therefor: "(e) Any withdrawal hereunder which constitutes an Eligible Rollover Distribution shall be subject to the Direct Rollover election described in Section 10.5." III. As amended hereby, the Plan is specifically ratified and reaffirmed. -3- 4 IN WITNESS WHEREOF, the undersigned has caused these presents to be executed this _____ day of ________________, 1999. DYNEGY INC. BY: ----------------------------------------- NAME: ------------------------------------ TITLE: ----------------------------------- -4- EX-10.58 10 5TH AMEND. TO PROFIT SHARING/401(K) SAVINGS PLAN 1 EXHIBIT 10.58 FIFTH AMENDMENT TO DYNEGY INC. PROFIT SHARING/401(k) SAVINGS PLAN WHEREAS, Dynegy Inc. (the "Company") and other Employers have heretofore adopted the Dynegy Inc. Profit Sharing/401(k) Savings Plan (the "Plan") for the benefit of their eligible employees; and WHEREAS, the Company amended and restated the Plan on behalf of itself and the other Employers, effective as of January 1, 1998; and WHEREAS, the Company desires to further amend the Plan on behalf of itself and the other Employers; NOW, THEREFORE, the Plan shall be amended as follows, effective as of October 1, 1999: 1. Section 8.3 of the Plan shall be amended by adding the following new Paragraph (g) to the end of such Section: "(g) Paragraphs (b), (d), and (e) above notwithstanding, if a Member shall cease to be employed during the one-year period beginning on the date of the closing of the Illinova Transaction by reason of an Involuntary Termination (as such terms are hereinafter defined), then such Member shall have a 100% Vested Interest in his Employer Contribution Account. For purposes of this Paragraph (g), the following terms shall have the meanings set forth below: (1) 'Excluded Termination' shall mean any termination of a Member's employment with the Employer by reason of a merger, acquisition, sale, transfer, outsourcing, reorganization or restructuring of all or part of the Employer or any affiliate or division thereof where either (i) such Member is offered another position within the Employer that provides such Member with a base salary at least equal to or greater than his base salary in effect on the last day of such Member's active service for the Employer (including, without limitation, a position that would require such Member to transfer to a different work location so long as he has been offered the Employer's standard relocation package in connection with such transfer) or (ii) such Member accepts any position with a successor company (as hereafter defined), including an outside contractor, whether affiliated or unaffiliated with the Employer. For purposes of the preceding sentence, a successor company is (A) any entity that assumes operations or functions formerly carried out by the Employer (such as the buyer of a facility, asset or division or any entity to which the Employer operation or function has been outsourced), (B) any affiliate of the Employer, or (C) any entity making the job offer at the request of the Employer (such as a joint venture of which the Employer or an affiliate is a member). (2) 'Illinova Transaction' shall mean the transactions contemplated in that certain Agreement and Plan of Merger dated as of June 14, 1999, by and among Illinova Corporation, Energy Convergence Holding 2 Company, Energy Convergence Acquisition Corporation, Dynegy Acquisition Corporation, and the Company, as the same may be amended from time to time. (3) 'Involuntary Termination' shall mean, with respect to each Member, any termination of such Member's employment with the Employer; provided, however, that the term `Involuntary Termination' shall not include a voluntary resignation by such Member, an Excluded Termination, a Termination for Cause, or any termination as a result of such Member's death or total and permanent disability (as defined in Section 7.2). (4) 'Termination for Cause' shall mean any termination of a Member's employment with the Employer by reason of such Member's (i) conviction of a misdemeanor involving moral turpitude or a felony, (ii) engagement in conduct which is materially injurious (monetarily or otherwise) to the Employer or any of its affiliates (including, without limitation, misuse of the Employer's or an affiliate's funds or other property), (iii) engagement in gross negligence or willful misconduct in the performance of such individual's duties, (iv) willful refusal without proper legal reason to perform such individual's duties and responsibilities, (v) material breach of any material provision of any agreement between the Employer and such individual, or (vi) material breach of any material corporate policy maintained and established by the Employer that is of general applicability to Members." 2. As amended hereby, the Plan is specifically ratified and reaffirmed. IN WITNESS WHEREOF, the undersigned has caused these presents to be executed this _____ day of ________________, 1999. DYNEGY INC. BY: --------------------------- NAME: -------------------- TITLE: -------------------- -2- EX-10.59 11 6TH AMEND. TO PROFIT SHARING/401(K) SAVINGS PLAN 1 EXHIBIT 10.59 SIXTH AMENDMENT TO DYNEGY INC. PROFIT SHARING/401(K) SAVINGS PLAN WHEREAS, Dynegy Inc. (the "Company") and other Employers have heretofore adopted the Dynegy Inc. Profit Sharing/401(k) Savings Plan (the "Plan") for the benefit of their eligible employees; and WHEREAS, the Company amended and restated the Plan on behalf of itself and the other Employers, effective as of January 1, 1998; and WHEREAS, the Company desires to further amend the Plan on behalf of itself and the other Employers; NOW, THEREFORE, the Plan shall be amended as follows, effective as of December ____, 1999: 1. Section 1.1(56) of the Plan shall be amended by adding the following new sentence to the end of such Section: "Solely for purposes of the preceding sentence and Sections 3.3, 4.2(c), and 4.2(d), a Facility Employee (as hereinafter defined) shall be considered employed by the Employer on the last day of the Plan Year beginning on January 1, 1999. A 'Facility Employee' means each individual who was employed by the Employer at the Employer's Texarkana facility, New Hope facility, East Texas facility, Myrtle Springs facility, Ginger facility, or Eustace facility (collectively, the 'Facilities') immediately prior to the sale of the Facilities to Sulphur River Gathering L.P. or an affiliate thereof." 2. As amended hereby, the Plan is specifically ratified and reaffirmed. IN WITNESS WHEREOF, the undersigned has caused these presents to be executed this _____ day of December, 1999. DYNEGY INC. BY: ---------------------- NAME: ----------------- TITLE: ----------------- EX-10.60 12 7TH AMEND. TO PROFIT SHARING/401(K) SAVINGS PLAN 1 EXHIBIT 10.60 SEVENTH AMENDMENT TO DYNEGY INC. PROFIT SHARING/401(K) SAVINGS PLAN WHEREAS, Dynegy Inc. (the "Company") and other Employers have heretofore adopted the Dynegy Inc. Profit Sharing/401(k) Savings Plan (the "Plan") for the benefit of their eligible employees; and WHEREAS, the Company amended and restated the Plan on behalf of itself and the other Employers, effective as of January 1, 1998; and WHEREAS, the Company desires to further amend the Plan on behalf of itself and the other Employers; NOW, THEREFORE, the Plan shall be amended as follows, effective as of January ____, 2000: 1. Section 10.5 of the Plan shall be amended by adding the following sentences to the end of such Section: "Notwithstanding the foregoing or any other provision in the Plan to the contrary, the Eligible Rollover Distribution of a DOCC Member (as hereinafter defined) may, at the election of such DOCC Member, include any outstanding loan from the Plan to such DOCC Member provided that (A) no portion of such loan is funded from such DOCC Member's After-Tax Account, (B) the Eligible Retirement Plan that will receive such Eligible Rollover Distribution (or the portion thereof that includes any such loan) is maintained by El Paso Energy Corporation or an affiliate thereof, (C) such Eligible Retirement Plan will accept such Eligible Rollover Distribution (including such loan), and (D) such DOCC Member's election to have such Eligible Rollover Distribution (including such loan) paid directly to such Eligible Retirement Plan is made prior to June 1, 2000, in the manner prescribed by the Committee. A 'DOCC Member' means each Member who was employed by Dynegy Operating Company California, Inc. at the time of the sale of such corporation to El Paso Energy Corporation or an affiliate thereof." 2. As amended hereby, the Plan is specifically ratified and reaffirmed. IN WITNESS WHEREOF, the undersigned has caused these presents to be executed this _____ day of January, 2000. DYNEGY INC. BY: ------------------------------ NAME: ------------------------- TITLE: ------------------------- EX-12.1 13 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 DYNEGY INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($ IN 000'S) ================================================================================
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 1999 1998 1997 1996 1995 1994 -------- --------- --------- --------- --------- ---------- Computation of Earnings: Pre-tax income (loss) from continuing operations $226,526 $158,691 $(149,895) $169,645 $ 65,234 $ 44,105 Undistributed income from equity Investees 13,754 6,477 4,073 21,729 9,169 3,803 -------- -------- --------- -------- -------- -------- Computed Earnings (Loss) 212,772 152,214 (153,968) 147,916 56,065 40,302 -------- -------- --------- -------- -------- -------- Fixed Charges: Interest costs: Expensed 75,730 73,672 63,455 46,202 34,475 1,114 Capitalized 16,695 7,591 8,800 1,200 1,028 -- Minority interest in income of a subsidiary 16,632 16,632 9,841 -- -- -- Amortization of financing costs 2,434 1,320 943 772 1,132 1,267 Amortization of Premium -- (2,568) (6,768) (4,892) (3,216) -- Rental expense representative of interest factor 13,786 20,698 13,572 4,171 3,719 955 -------- -------- --------- -------- ------- -------- Total Fixed Charges 125,277 117,345 89,843 47,453 37,138 3,336 -------- -------- --------- -------- ------- -------- Earnings Before Income Taxes and Fixed Charges $321,354 $261,968 $ (72,925) $194,169 $92,175 $ 43,638 ======== ======== ========= ======== ======= ======== Ratio of Earnings to Fixed Charges 2.56 2.23 (a) 4.09 2.48 13.08 ======== ======== ========= ======== ======= ========
(a) Earnings are inadequate to cover fixed charges for the year ended December 31, 1997, by approximately $72.9 million. EX-22.1 14 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 22.1 SUBSIDIARIES OF DYNEGY INC. AS OF 12/31/99
SUBSIDIARY STATE OR JURISDICTION OF INCORPORATION - ---------- -------------------------------------- 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 15 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File No's. 333-96045 and 333-96047) and Form S-3 (File No. 333-31394). ARTHUR ANDERSEN LLP Houston, Texas March 1, 2000 EX-27.1 16 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 3-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 DEC-31-1999 DEC-31-1998 45,230 28,367 0 0 2,041,416 1,623,738 0 0 271,884 149,901 2,805,080 2,117,241 2,575,100 2,446,878 (557,219) (514,771) 6,525,171 5,264,237 (2,538,523) (2,026,323) 0 0 0 0 (75,418) (75,418) (1,575) (1,533) (1,232,489) (1,126,530) (6,525,171) (5,264,237) (15,429,976) (14,257,997) (15,429,976) (14,257,997) 14,886,101 13,829,310 14,886,101 13,829,310 45,519 7,677 0 0 78,164 74,992 (226,526) (158,691) 74,677 50,338 (151,849) (108,353) 0 0 0 0 0 0 (151,849) (108,353) 0.98 0.71 0.91 0.66
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