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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000912057-01-503442.txt : 20010314
<SEC-HEADER>0000912057-01-503442.hdr.sgml : 20010314
ACCESSION NUMBER: 0000912057-01-503442
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010313
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: 1566888
BUSINESS ADDRESS:
STREET 1: 1000 LOUISIANA
STREET 2: STE 5800
CITY: HOUSTON
STATE: TX
ZIP: 77002
BUSINESS PHONE: 7133677600
MAIL ADDRESS:
STREET 1: 1000 LOUISIANA
STREET 2: SUITE 5800
CITY: HOUSTON
STATE: TX
ZIP: 77002
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
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>a2041096z10-k405.txt
<DESCRIPTION>10K-405
<TEXT>
<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER: 1-15659
--------------------------
DYNEGY INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(713) 507-6400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class: Name of each exchange on which registered:
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<S> <C>
Class A Common Stock, no par value New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
Title of each class: Name of each exchange on which registered:
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<S> <C>
None --
</TABLE>
--------------------------
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 / /
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/
Aggregate market value of voting stock held by non-affiliates of the registrant
as of March 7, 2001, computed by reference to the closing sale price of the
registrant's common stock on the New York Stock Exchange on such date:
$12,051,431,963
Number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date: Class A common stock, no par value per share,
238,944,006 shares outstanding as of March 7, 2001; Class B common stock, no par
value per share, 86,499,914 shares outstanding as of March 7, 2001.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of Parts I, II and IV incorporate
the Annual Report to Shareholders for the fiscal year ended December 31, 2000.
As to Part III (items 10, 11, 12 and 13), Notice and Proxy Statement for the
2001 Annual Meeting of Shareholders to be filed not later than 120 days after
December 31, 2000.
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<PAGE>
DYNEGY INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I
Item 1. Business 1
Item 1A. Executive Officers 22
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 25
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 49
Item 8. Financial Statements and Supplementary Data 50
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 50
PART III
Item 10. Directors and Executive Officers of the Registrant 51
Item 11. Executive Compensation 51
Item 12. Security Ownership of Certain Beneficial Owners and
Management 51
Item 13. Certain Relationships and Related Transactions 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K 52
Signatures 61
</TABLE>
<PAGE>
DYNEGY FORM 10-K
1
PART I
ITEM 1. BUSINESS
THE COMPANY
Dynegy Inc. ("Dynegy" or the "Company") is a leading provider of energy and
communications solutions to customers in North America, the United Kingdom and
Continental Europe. The Company's leadership position extends across the entire
convergence value chain, from broadband, power generation and wholesale and
direct commercial and industrial marketing and trading of power, natural gas,
coal, emission allowances and weather derivatives to transportation, gathering
and processing of natural gas liquids. The Company also is involved in the
transmission and distribution of electricity and natural gas and provides retail
service to electric and gas consumers.
Dynegy's strategy involves ownership or control of physical assets, which
provide marketing, trading and arbitrage opportunities that occur across
commodity products, geographic regions and over time. The Company executes this
strategy across substantially all of its businesses.
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; Aurora, Colorado; Boston, Massachusetts; Calgary,
Alberta; Chicago, Illinois; Dallas, Texas; Decatur, Illinois; Elida, Ohio; Hong
Kong, China; Hyderabad, India; London, England; Midland, Texas; Milan, Italy;
Montreal, Quebec; Oakville, Ontario; Oklahoma City, Oklahoma; Paris, France;
Pleasanton, California; Tampa, Florida; Washington D.C.; and Vienna, Austria.
<PAGE>
DYNEGY FORM 10-K
2
DEFINITIONS
As used in this Form 10-K, the abbreviations listed below are defined as
follows:
<TABLE>
<S> <C>
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.
HOLDINGS Dynegy Holdings Inc., a wholly owned subsidiary of Dynegy
Inc.
IP Illinois Power Company, a wholly owned subsidiary of Dynegy
Inc.
LATA A geographical location established by the Federal
Communications Commission for the provision and
administration of local telecommunication service. A LATA
may encompass one or more area code.
LPG Liquid petroleum gas.
MBBLS/D Thousands of barrels per day.
MCF Thousands of cubic feet.
MMBTU Millions of Btu.
MMCF/D Volume of one million cubic feet per day.
MW Megawatts.
NGLS Natural gas liquids.
POPS Point of presence - the physical location within a LATA
where a long distance carrier interfaces with the network of
the local exchange carrier. The point at which the local
exchange carrier terminates subscribers' circuits for long-
distance dial-up or leased-line communciations.
</TABLE>
<PAGE>
DYNEGY FORM 10-K
3
SEGMENT DISCUSSION
[CHART]
The Company has four reportable business segments: Dynegy Marketing and Trade,
Dynegy Midstream Services, Transmission and Distribution and Dynegy Global
Communications. Both the transmission and distribution and communications
segments were formed in 2000.
DYNEGY MARKETING AND TRADE SEGMENT
GENERAL. This segment is actively engaged in value creation through marketing
and trading of natural gas, power, coal, emissions allowances and the generation
of electricity principally under the name Dynegy Marketing and Trade ("DMT").
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 diverse 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 marketing and
trading as the "Merchant Leverage Effect".
<PAGE>
DYNEGY FORM 10-K
4
[CHART]
Dynegy views its gas and power marketing and power generation businesses as an
integrated unit. 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 marketing and trading
franchise adds value to its generation assets by providing national market
access, market infrastructure and intelligence, risk-management and arbitrage
opportunities, fuel management and procurement expertise and transmission
expertise for inputs (gas, coal and fuel oil) and outputs (power). Generation
capacity adds value to the Company's wholesale marketing and trading 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.
Dynegy will seek to replicate its vision of the domestic convergence businesses
throughout Canada, the United Kingdom, Continental Europe and other markets as
those markets open up to greater competition. Such convergence is subject to the
unique attributes associated with any market deregulation in those areas. The
Company maintains energy marketing and trading operations in Canada, the United
Kingdom and Continental Europe and is continuing to assess local, regional and
national markets, regulatory environments and other factors in order to support
and direct future investment.
NATURAL GAS PURCHASES. Dynegy has the obligation to purchase at various index
prices and the right to market substantially all of the natural gas produced or
controlled by Chevron U.S.A. Inc. ("Chevron") in the United States (except
Alaska). The Chevron relationship provides the Company with a significant,
stable supply of natural gas
<PAGE>
DYNEGY FORM 10-K
5
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. For the year ended December 31, 2000, the Company sold an aggregate
average of 10.9 Bcf/d 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.
POWER. Dynegy markets electricity and power products and services, 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 2000, Dynegy sold 109.1
million megawatt-hours of electricity.
<PAGE>
DYNEGY FORM 10-K
6
At December 31, 2000, Dynegy had interests in power projects in operation, under
construction, in development or pending acquisition, having gross capacity of
over 16,000 MW of electricity. These power plants are located in California,
Florida, Georgia, Illinois, Kentucky, Louisiana, Michigan, Nevada, New York,
North Carolina, Texas, Virginia, Washington, Costa Rica, Honduras, Jamaica,
Panama and Peru. The Company's generation assets include projects that are
Exempt Wholesale Generators ("EWGs") (including "Merchant Plants") or Qualifying
Facilities ("QFs"). A Merchant Plant operates independently from designated
power purchasers, and as a result, will generate and sell power to the market
when electricity sales prices exceed the cost of production. Merchant Plants
provide flexibility to the Company in executing its energy convergence strategy.
A QF is operated under laws outlined in the Public Utilities Regulatory Policies
Act of 1978 ("PURPA"), by the Federal Energy Regulatory Commission ("FERC") and
by certain state legislatures, and typically sells the power it generates to a
single power purchaser. The combined gross capacity of owned facilities in
operation at December 31, 2000 approximated 13,100 MW of electricity and 3.3
million pounds per hour of steam sold to third parties. Approximately 65 percent
of these facilities were solely gas-fired plants, with the remaining facilities
fueled by coal, wind, heavy fuel oil or some combination thereof. In 2000, there
were 29 external customers who bought power generated from the plants owned or
controlled by Dynegy. Approximately 80 percent of power generation revenues were
received from three of these customers. Further, purchases from two suppliers
accounted for approximately 29 percent of purchases made by the power plants.
In addition to ownership and operation of generating capacity, the Company may,
at times, provide services to affiliate ventures in the areas of project
development, engineering, regulatory and environmental affairs, operating and
maintenance services, business management and fuel supply.
RETAIL. Deregulation of the retail gas and power markets is evolving to
encourage greater competition and access to markets. Dynegy's retail gas and
electric strategy is to strengthen key customer relationships by forming a
number of regional retail gas and power alliances, which mitigates the large
capital investment and financial risks necessitated by other national retail
marketing strategies. 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.
<PAGE>
DYNEGY FORM 10-K
7
DYNEGY MIDSTREAM SERVICES SEGMENT
GENERAL. During 2000, Dynegy Midstream Services ("DMS") continued its
commitment to operating principles that address cost control, strategic asset
management, supply reliability, risk-management and culture. This commitment has
led to highly competitive, safe and environmentally sound operations.
This segment consists primarily of the Company's North American midstream
liquids operations and global LPG transportation and NGL marketing operations,
located primarily in Houston and in London. North American midstream liquids
operations are actively engaged in gathering and processing natural gas and
transportation, fractionation, storage and marketing of NGLs. Dynegy has
captured significant cost and operating efficiencies as well as attractive
returns on services provided to the market through the independent ownership and
operation of these assets. Dynegy's vertically integrated NGL infrastructure
extracts profit throughout the value chain extending from inlet natural gas
volumes gathered from the world's producing horizons to marketing NGLs to
wholesalers and end users throughout the world.
[CHART]
During 2000, DMS completed its asset divestiture strategy, which included the
sale of all Mid-continent assets and the domestic crude oil marketing and trade
business. Additionally, it was announced that the Company's Canadian midstream
assets will be sold in the first quarter of 2001.
DMS is now positioned to maximize earnings from its vertically integrated core
gas gathering, processing and downstream
<PAGE>
DYNEGY FORM 10-K
8
assets. Similar to DMT's convergence strategy, ownership and control of upstream
processing and downstream fractionation, storage and transportation assets
provide trading and arbitrage opportunities to DMS' NGL marketing and trading
business. DMS' management, people and capital resources are aligned and focused
on exploiting growth opportunities in all core areas, including the high-growth
Gulf of Mexico region and areas outside North America.
[CHART]
The Company is a recognized industry leader in substantially all midstream
component businesses, ranging from natural gas processing to marketing NGLs to
end users. After concluding the strategic Mid-continent asset sale, Dynegy is
the sixth largest processor of natural gas in the United States.
NATURAL GAS GATHERING AND PROCESSING. The natural gas processing industry is a
major oil and gas industry segment, providing the necessary service of refining
raw natural gas into marketable, pipeline quality natural gas and NGLs. The
Company owns interests in 26 gas processing plants, including 16 plants it
operates, as well as associated and stand-alone natural gas gathering pipeline
systems. These assets are primarily located in key producing areas of Louisiana,
New Mexico and Texas. During 2000, the Company processed on average 2.1 Bcf/d of
natural gas and produced on average 97 thousand barrels per day of NGLs, net to
the Company's interest.
Dynegy has 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.
<PAGE>
DYNEGY FORM 10-K
9
Dynegy's natural gas processing services are provided at two types of 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 NGLs and to remove water vapor, solids and other contaminants. Straddle
plants are situated on mainline natural gas pipelines and allow operators to
extract NGLs from a natural gas stream when the market value of NGLs separated
from the natural gas stream is higher than the market value of the same
unprocessed natural gas.
FRACTIONATION. Liquids removed from natural gas at processing plants are
generally in the form of a commingled stream of light liquid hydrocarbons (raw
product). The commingled NGLs are separated at fractionation facilities into
component products of ethane, propane, normal butane, isobutane and natural
gasoline. The Company has ownership interests in three stand-alone fractionation
facilities: two in Mont Belvieu, Texas and one in Lake Charles, Louisiana. The
Company operates the Louisiana facility and one of the Mont Belvieu facilities.
During 2000, these facilities fractionated an aggregate average of 224 thousand
gross barrels per day.
NGL TRADING AND WHOLESALE MARKETING. During 2000, the Company sold approximately
565 thousand barrels per day of NGLs to nearly 800 customers. In 2000,
approximately 19 percent of the Company's NGL purchases and approximately 27
percent of NGL sales were made with Chevron or one of its affiliates.
The Company markets its own NGL production and also purchases NGLs from third
parties for resale throughout the world. NGL trading sold approximately 363
thousand barrels per day of NGLs in North America in 2000. NGL trading extracts
premiums from markets relying on processing and fractionating assets and
performs commodity price risk-management activities. In 2000, Wholesale
Marketing delivered 100 thousand barrels per day of LPG on average and provided
other services to end markets, such as refineries and retailers of NGLs.
Dynegy also markets and trades LPG worldwide via chartered large-hull ships. In
2000, 102 thousand barrels per day of LPG was marketed and traded by this
business. These operations acquire, market and trade product from producing
areas in the North Sea, West Africa, Algeria and the Arabian Gulf as well as
from the U.S. Gulf Coast region. Dynegy expects continued expansion of this
international business through development of facilities in existing producing
areas as well as in developing downstream markets.
TRANSPORTATION OPERATIONS. The Company has developed a strategic mix of gas
liquids transportation infrastructure that services product delivery needs of
its worldwide liquids trading and wholesale marketing businesses. In the U.S.,
the
<PAGE>
DYNEGY FORM 10-K
10
Company owns over 9,700 miles of gas gathering and gas liquids pipelines,
primarily in the Arklatex, Gulf Coast and Permian Basin regions. It also owns or
leases approximately 1,700 railcars and owns or leases 72 tank trucks and 29
pressurized barges. These assets are deployed to serve its wholesale
distribution terminals, Gulf Coast fractionators, underground storage
facilities, pipeline injection terminals, and many of the nation's crude oil
refineries. The Company's large-scale marine terminals are located in Texas,
Florida and Louisiana, offering importers and wholesalers a variety of methods
for transporting products to the marketplace. Dynegy controls over 60 million
barrels of underground liquids storage capacity in Texas, Louisiana, and
Mississippi, providing customers with the ability to store, trade, buy and sell
specification products. The Company charters three VLGC (Very Large Gas
Carriers), totaling more than 130,000 tons of capacity, which support its
worldwide marketing and trading activities. Two newly built VLGC are committed
to charter and scheduled for 2001 and 2002 delivery.
TRANSMISSION & DISTRIBUTION SEGMENT
The transmission and distribution segment consists of IP's operations acquired
in the Illinova Corporation ("Illinova") acquisition that closed in early 2000.
IP is based in Decatur, Illinois and provides retail electric and natural gas
service to residential, commercial and industrial consumers in substantial
portions of northern, central and southern Illinois. Electric transmission
service also is supplied to numerous utilities, municipalities and power
marketing entities.
IP supplies retail electric service to an estimated population of 1.3 million
and holds franchises in all of the 311 incorporated municipalities in which it
furnishes such service. Retail natural gas service is supplied by IP to a
population of approximately 1 million, and IP holds franchises in all of the 266
incorporated municipalities in which it furnishes such service. As of December
31, 2000, based on the number of billable meters, IP served over 587,000 active
electric customers and over 412,000 active gas customers. IP's highest system
peak hourly demand (native retail load) in 2000 was 3,473 MW on August 31, 2000.
IP experienced its 2000 peak-day delivery of 647,004 MMBtu of natural gas on
December 21, 2000.
IP has seven underground gas storage fields having a total capacity of
approximately 11.5 Bcf and a total deliverability on a peak day of about 312,000
Mcf. IP also has contracts with various natural gas suppliers and producers for
5.1 Bcf of underground storage capacity, having total deliverability on a peak
day of 93,000 Mcf. Operation of underground storage permits IP to increase
deliverability to its customers during peak load periods by extracting gas which
was previously put into storage during the off-peak months.
<PAGE>
DYNEGY FORM 10-K
11
IP owns an interconnected electric transmission system of approximately 2,800
circuit miles and a distribution system that includes approximately 36,000
circuit miles of overhead and underground lines. Additionally, IP owns 757 miles
of gas transmission pipe and 7,486 miles of gas distribution pipe. All of these
properties are located in Illinois.
DYNEGY GLOBAL COMMUNICATIONS SEGMENT
Dynegy Global Communications ("DGC") is engaged in pursuing and capturing
opportunities in the converging energy and communications marketplace. In
applying its convergence strategy, DGC is developing a global state-of-the-art,
low-cost network that will enable Dynegy to become a leader in the broadband
marketing and trading arena through integration of physical assets with
marketing and trading acumen.
DynegyCONNECT, L.P., DGC's North American subsidiary, is developing the first
nationwide optically switched data network that will consist of approximately
16,000 route miles and 44 POPs by the fourth quarter of 2001. This joint venture
with Telstra Corporation Ltd., Australia's premier telecommunications company
and 20 percent owner of DynegyCONNECT, L.P. ("Connect") provides us with access
to its extensive Asia-Pacific network.
Dynegy Europe Communications ("DEC") was formed following the acquisition of
iaxis Limited ("iaxis"), a previously privately held, London-based
communications company. Through the completion of this purchase in the first
quarter of 2001, DEC acquired a fiber optic network and state-of-the-art optical
equipment and technology deployed at more than 20 strategically located
co-location and hub sites throughout Europe. Dynegy also formed a broadband
marketing and trading subsidiary to pursue future bandwidth commoditization
opportunities. Dynegy believes it entered the communications industry at the
right time since the recent decline in the sector enabled it to do so at a
relatively low cost. Dynegy will continue to pursue its "asset-lite" network
strategy in building its world-wide broadband marketing and trading operation.
COMPETITION
Dynegy faces strong competition relating to the energy industry in the
development of new electricity generating plants, the acquisition of existing
generating facilities and the marketing and transportation of related
commodities. The Company's primary competition is with energy marketing and
trading companies as well as entities vying for market share in the deregulating
domestic electricity generating and marketing industries. As a result of
expanding energy operations in Europe, Dynegy also is experiencing competition
in these markets from companies having substantial financial and intellectual
resources.
<PAGE>
DYNEGY FORM 10-K
12
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. 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 its 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 generation and power
generating facilities which are often 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.
Dynegy's entrance into the communications industry also subjects Dynegy to new
competition with industry participants having substantial financial resources
and significant industry expertise. Through the execution of its business plan,
Dynegy expects to continue to compete with a substantial number of
communications companies, many of which have greater resources and/or focus only
on one industry or a niche within a single industry. While Dynegy believes that
it will be successful in executing its business plan and in competing for market
share with industry participants, failure to compete effectively could have a
material adverse effect on Dynegy's profitability.
The Company's NGL 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,
marketing of NGLs, crude
<PAGE>
DYNEGY FORM 10-K
13
oil, residue gas, condensate and sulfur and transportation of natural gas, NGLs
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. 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 compete effectively.
Dynegy believes its intellectual capital, technological advances, financial
condition and access to capital markets will play an increasing role in
distinguishing the Company from many of its competitors.
REGULATION
GENERAL. The Company is subject to regulation by various federal, state, local
and foreign agencies, including the regulations described below. Although
significant capital expenditures may be required to comply with these
regulations, such compliance has not materially adversely affected the Company's
historical earnings or competitive position.
NATURAL GAS REGULATION. The transportation and sale for resale of natural gas
in interstate commerce is subject to regulation by the 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"). The rates charged by interstate
pipelines, including those owned by the Company, for interstate transportation
and storage services also are regulated by the FERC.
In the first quarter of 2000, the FERC issued Order No. 637, which introduced
several measures to increase competition for interstate pipeline transportation
services. Interstate pipelines began implementation of the new regulations in
May 2000. Order No. 637 has not adversely affected, and is not expected to
adversely affect, the Company's operations.
Certain federal and provincial regulatory authorities require parties to
transactions involving natural gas exports to hold export or removal permits.
The Company's indirect wholly owned Canadian subsidiary, Dynegy Canada Inc.,
holds various Canadian and U.S. permits for such purposes. In the United
Kingdom, the natural gas business is subject to regulation by the Office of Gas
Supply.
GAS PROCESSING. Dynegy's gas processing operations could become subject to FERC
regulation under certain circumstances. 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. Dynegy believes its gas processing plants are
primarily involved in removing NGLs and, therefore, are exempt from FERC
jurisdiction. Nevertheless, the FERC has
<PAGE>
DYNEGY FORM 10-K
14
made no specific finding as to Dynegy's gas processing plants. In addition,
certain facilities downstream of processing plants are being considered for use
in transporting gas between pipelines, which may invoke FERC's jurisdiction.
Such jurisdiction likely would apply to the downstream facility as a pipeline,
however, and not to the plants themselves.
GAS GATHERING. The NGA exempts gas gathering facilities from the jurisdiction
of the FERC, while interstate transmission facilities remain subject to FERC
jurisdiction. Dynegy believes its gathering facilities and operations meet the
current tests used by the FERC to determine nonjurisdictional gathering facility
status, although the FERC's articulation and application of such tests have
varied over time. No assurance can be given that all of Dynegy's gas gathering
facilities will remain classified as such and, therefore, exempt from FERC or
other regulation.
ELECTRICITY MARKETING REGULATION. The Company's electricity marketing
operations are regulated by the Federal Power Act ("FPA") and the FERC with
respect to rates, terms and conditions of services and certain reporting
requirements. Current FERC policies permit marketing and trading entities to
market electricity at market-based rates.
In December 1999, the FERC issued Order No. 2000, which addressed a number of
issues relating to the regional transmission of electricity. In particular,
Order No. 2000 provided for regional transmission organizations ("RTOs") to
control the transmission facilities within a particular region. The impact of
these new RTOs on the Company's electricity marketing operations cannot be
predicted.
POWER GENERATION REGULATION. The Company's cogeneration and independent power
production operations are subject to regulation by the FERC under PURPA with
respect to rates, the procurement and provision of certain services and
operating standards. The Company's independent power production operations are
subject to regulation under the FPA and the Energy Policy Act of 1992 and have
received authority from FERC to sell at market-based rates.
The FPA grants the FERC exclusive ratemaking jurisdiction over wholesale sales
of electricity in interstate commerce. Although facilities deemed QFs under
PURPA are exempt from ratemaking and certain other provisions of the FPA, non-QF
independent power projects and certain power marketing activities are subject to
the FPA and the FERC's ratemaking jurisdiction. All of the projects currently
owned or operated by Dynegy as QFs under PURPA are exempt from the FPA. Dynegy's
independent power projects that are not QFs have, however, been granted market-
based rate authority and comply with the FPA requirements governing approval of
wholesale rates and subsequent transfers of
<PAGE>
DYNEGY FORM 10-K
15
ownership interests in such projects. In limited markets where Dynegy owns
generation facilities, specifically, California and New York, the FERC has from
time to time approved temporary price caps on wholesale power sales.
Dynegy's international power generation and transmission projects are subject to
various national, provincial and local regulations, worldwide environmental
standards and other requirements. 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.
STATE REGULATORY REFORMS. The Company's gas and power marketing and power
generation businesses are subject to various regulations from the states in
which they operate. Proposed reforms to these regulations are proceeding in
several states, including California, the results of which could effect the
Company's operations. While the impact of these regulations and reforms on the
Company's businesses cannot be predicted with certainty, the Company does not
believe that any such matters will have a material adverse effect on the
Company's earnings or competitive position.
ILLINOIS POWER COMPANY. IP is an electric utility as defined in the Public
Utility Holding Company Act of 1935 ("PUHCA"). Its direct parent company,
Illinova, and Dynegy are holding companies as defined in PUHCA. However, each of
Illinova and Dynegy generally are exempt from regulation under section 3(a)(1)
of PUHCA. They remain subject to regulation under PUHCA with respect to the
acquisition of certain voting securities of other domestic public utility
companies and utility holding companies.
In recent years, several bills have been introduced in Congress that would
repeal PUHCA. Repeal or significant modification to PUHCA could affect the
Company and the electric utility industry generally. The Company cannot predict
the outcome of the repeal efforts or the outlook for additional legislation in
2001.
IP also is subject to regulation by the FERC under the FPA as to transmission
rates and certain other matters. The FERC has declared IP exempt from the NGA
and related FERC orders, rules and regulations.
IP is further subject to regulation by the State of Illinois and the Illinois
Commerce Commission ("ICC"). The Illinois Public Utilities Act was significantly
modified in December 1997 by the Electric Service Customer Choice and Rate
Relief Law of 1997, or P.A. 90-561, but the ICC still has broad powers of
supervision and regulation with respect to rates and charges and various other
matters. Under P.A. 90-561, IP must continue to provide bundled retail electric
services to all who choose to
<PAGE>
DYNEGY FORM 10-K
16
continue to take service at tariff rates and must provide unbundled electric
distribution services to all eligible customers as defined by P.A. 90-561 at
rates determined by the ICC.
Among other things, P.A. 90-561 also required IP to participate in an
independent system operator, or ISO. To that end, in January 1998, IP, in
conjunction with eight other transmission-owning entities, filed with the FERC
for all approvals necessary to create and to implement the Midwest Independent
Transmission System Operator, Inc. ("MISO"). On September 20, 2000, IP announced
its intention to withdraw its participation in the MISO and to become a member
of the Alliance Regional Transmission Organization ("Alliance RTO"), pending
approval from necessary regulatory bodies including FERC. On October 13, 2000,
IP filed a notice of its intent to withdraw from the MISO with FERC. On
December 22, 2000, IP signed an agreement to join the Alliance RTO, which was
filed with the FERC on January 16, 2001. On February 23, 2001, IP reached a
settlement in principle with all parties that allows it to withdraw from the
MISO and join the Alliance RTO, effective upon FERC approval of the settlement,
which is expected to occur in mid-April 2001. IP has accrued an adequate amount
to cover its share of the settlement obligation. While the Company believes that
being part of the Alliance RTO would provide IP greater flexibility, cost
savings and maintained transmission reliability, the outcome of IP's withdrawal
cannot be predicted with certainty.
IP's retail natural gas sales also are regulated by the ICC. Such sales are
currently priced under a purchased gas adjustment mechanism under which IP's gas
purchase costs are passed through to its customers if such costs are determined
prudent.
SHAREHOLDER AGREEMENT
In connection with the Illinova acquisition, Chevron entered into a shareholder
agreement with Dynegy governing certain aspects of their relationship, some of
which are discussed below.
The shareholder agreement grants Chevron preemptive rights to acquire shares of
Dynegy common stock in proportion to its then-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 percent.
<PAGE>
DYNEGY FORM 10-K
17
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. Any offer by
Chevron for all of the outstanding stock is subject to an auction process, the
details of which are set forth in the shareholder agreement.
Upon consummation of the Illinova acquisition, Chevron received shares of Class
B common stock in exchange for the shares of common stock it owned in the former
Dynegy and purchased additional shares of Class B common stock for cash.
Chevron's ownership of Class B common stock entitles it to designate three
members of Dynegy's Board of Directors. The shareholder agreement prohibits
Chevron from selling or transferring shares of Class B common stock except in
the following transactions:
- - in a widely dispersed public offering; or
- - 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 further 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:
- - 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;
- - 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
- - 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
<PAGE>
DYNEGY FORM 10-K
18
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:
- - issuing any shares of Class B common stock to any person other than Chevron
and its affiliates;
- - amending any provisions in Dynegy's 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 of
Class B common stock or the three directors elected by such holders;
- - 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
- - acquiring, owning or operating a nuclear power facility, other than being a
passive investor in a publicly-traded company that owns a nuclear facility.
Generally, the provisions of the shareholder agreement terminate on the date
Chevron and its affiliates cease to own 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.
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
<PAGE>
DYNEGY FORM 10-K
19
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. Although the impact cannot
be predicted with certainty, these expenditures are not anticipated to have a
material adverse effect on Dynegy's operations or financial condition.
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
<PAGE>
DYNEGY FORM 10-K
20
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 EPA and the Department of
Justice ("DOJ") against IP and Dynegy Midwest Generation, which are described in
Item 8, Financial Statements and Supplementary Data, Note 11, management
believes that it is in substantial compliance with, and is expected to continue
to comply in all material respects with, applicable environmental statutes,
regulations, orders and rules. Further, to the best of 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 $14.3 million in 2000 compared to approximately $3.6
million in 1999. The increase from the prior year is primarily due to increased
ownership and control of generation assets as a result of the Illinova
acquisition. Total environmental expenditures for both capital and operating
maintenance and administrative costs are estimated to approximate $54 million in
2001.
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
<PAGE>
DYNEGY FORM 10-K
21
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 the
Company's 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, 2000, the Company had approximately 3,260 employees at its
administrative offices and approximately 2,518 employees at its operating
facilities. Approximately 1,845 employees at Company-operated facilities are
subject to collective bargaining agreements with one of the following unions:
Paper, Allied-Industrial, Chemical & Workers International Union; International
Brotherhood of Electrical Workers; Laborers International Union of North
America; United Association of Journeymen Plumbers and Gas Fitters;
International Association of Machinists and Aerospace Workers or Communications,
Energy and Paperworkers Union. Management considers relations with both union
and non-union employees to be satisfactory.
<PAGE>
DYNEGY FORM 10-K
22
ITEM 1A. EXECUTIVE OFFICERS
Set forth below are the names and positions of the current executive officers of
the Company, together with their ages, position(s) and years of service with the
Company.
<TABLE>
<CAPTION>
Served with
the Company
Name Age* Position(s) Since
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
C. L. Watson 51 Chairman of the Board, Chief Executive Officer, 1985
and a Director of the Company
Stephen W. Bergstrom 43 President, Chief Operating Officer, and a 1986
Director of the Company
Lawrence A. McLernon 62 Executive Vice President of Dynegy Inc. and 2000
Chairman and Chief Executive Officer, Dynegy
Global Communications of the Company
Kenneth E. Randolph 45 General Counsel and Secretary of the Company 1984
Robert D. Doty 43 Senior Vice President and Chief Financial 1991
Officer of the Company
Deborah A. Fiorito 51 Senior Vice President and Chief Communications 2000
Officer of the Company
Milton L. Scott 44 Senior Vice President and Chief Administrative 1999
Officer of the Company
R. Blake Young 42 President, Global Technology of the Company 1998
</TABLE>
- --------------------------
* As of March 1, 2001
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 in 1989. Prior to his employment with the Company, he served as Director
of Gas Sales for the Western United States for Conoco Inc. Mr. Watson serves on
the board of directors of Baker Hughes Incorporated.
Stephen W. Bergstrom, President and Chief Operating Officer of Dynegy Inc., is
responsible for the day-to-day 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 Executive Vice President of Dynegy Inc. After joining
the Company in 1986 as Vice President of Gas Supply, Mr. Bergstrom was promoted
to Senior Vice President of Gas Marketing and Supply in 1987. Prior to joining
the
<PAGE>
DYNEGY FORM 10-K
23
Company, Mr. Bergstrom was Vice President of Gas Supply for Enron Gas Marketing.
Lawrence A. McLernon, Executive Vice President of Dynegy Inc. and Chief
Executive Officer, Dynegy Global Communications, is responsible for the
execution of Dynegy's international communications strategy. Mr. McLernon
previously served as Chairman, President and Chief Executive Officer of Extant,
Inc. ("Extant") beginning in 1998, and joined Dynegy Inc. concurrent with the
acquisition of Extant effective in 2000. He is also the founding partner and
Senior Managing Director of McLernon & Associates, Ltd., a business development,
management consulting and financial advisory firm, with emphasis on the telecom,
multimedia and high technology industries. Additionally, Mr. McLernon is
President and owner of Stealth Network Technologies, Inc., a firm specializing
in the sale and installation of concealed antennas and towers used by cellular
and PCS companies. Prior to his position at Extant, Mr. McLernon was the
founding President of LiTel Communications Inc. also known as LCI International,
purchased by Qwest International, Inc., in 1999, the second all fiber network in
the U.S. and a premier provider of voice and data services.
Kenneth E. Randolph is General Counsel and Secretary of the Company. He has
served in this capacity with Dynegy since July 1987. In addition, he served as a
member of the Company's Management Committee from May 1989 through
February 1994 and managed the Company'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.
Robert D. Doty, Senior Vice President and Chief Financial Officer, joined the
Company in 1991 and has served as the Company's principal financial officer
since May 2000. In this capacity, Mr. Doty is responsible for the overall
financial strategy and operations of the Company. He is responsible for
accounting, finance, investor relations, risk control, treasury and tax.
Mr. Doty previously served as Senior Vice President of Finance. Prior to joining
the Company, Mr. Doty was employed by Arthur Andersen LLP.
Deborah A. Fiorito is Senior Vice President and Chief Communications Officer of
Dynegy Inc. In that role, she is responsible for the Company's branding and
advertising, media relations, internal and external communications and community
relations functions. Prior to joining Dynegy in 2000, Ms. Fiorito managed public
and governmental affairs for Chase Manhattan Bank-Texas and before that,
directed media relations and internal communications for Apache Corporation and
Mitchell Energy & Development Corp.
<PAGE>
DYNEGY FORM 10-K
24
Milton L. Scott is Senior Vice President and Chief Administrative Officer. He is
responsible for human resources, supply chain management, corporate planning,
compliance and internal audit, risk management and insurance, corporate
facilities management and corporate security for Dynegy Inc. Before joining the
Company in 1999, Mr. Scott was employed by Arthur Andersen LLP for 22 years,
where he served as partner-in-charge of the Gulf Coast region technology and
communications practice.
R. Blake Young, President, Global Technology of Dynegy Inc., is responsible for
technology deployment across Dynegy's core businesses including application
systems development and support, technology infrastructure and technology
planning and strategy. He is also responsible for Dynegy's e-commerce and
e-business initiatives, advancing the application of new technology to Dynegy's
businesses and identifying new technology-related alliances and investments.
Prior to joining the Company, Mr. Young was with Campbell Soup Company in 1997
and 1998 and served as Chief Information Officer of its U.S. Grocery Division.
Mr. Young was also employed by Tenneco Energy for approximately 13 years, where
he served as Vice President and Chief Information Officer.
ITEM 2. PROPERTIES
A description of the Company's properties is included in Item 1, Business, and
is incorporated herein by reference.
TITLE TO PROPERTIES
The Company believes it has satisfactory title to its properties in accordance
with standards generally accepted in its operating industries, 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.
ITEM 3. LEGAL PROCEEDINGS
See Item 8, Financial Statements and Supplementary Data, Note 11, which is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during the
fourth quarter of 2000.
<PAGE>
DYNEGY FORM 10-K
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A common stock, no par value per share (the "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 March 7, 2001 was 21,968.
The Company's Class B common stock, no par value per share (the "Class B Common
Stock" and, together with the Class A Common Stock, the "Common Stock"), is
neither listed nor traded on any exchange, and there is no established public
trading market for such stock. All of the shares of Class B Common Stock are
owned by Chevron U.S.A. Inc.
The following table sets forth the high and low sales prices for the Class A
Common Stock for each full quarterly period during the fiscal years ended
December 31, 2000 and 1999, respectively, as reported on the New York Stock
Exchange Composite Tape, and related dividends paid per share of Common Stock
during such periods. Such prices and dividends paid per share of Common Stock
prior to August 22, 2000 are adjusted for a two-for-one stock split. Such prices
and dividends paid per share of Common Stock prior to February 1, 2000 are
adjusted for the 0.69-to-one exchange ratio in the Illinova acquisition.
SUMMARY OF DYNEGY'S COMMON STOCK PRICE AND DIVIDEND PAYMENTS
<TABLE>
<CAPTION>
High Low Dividend
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000:
FOURTH QUARTER $56.625 $43.313 $0.075
THIRD QUARTER 57.578 34.758 0.075
SECOND QUARTER 39.938 27.625 0.075
FIRST QUARTER 31.367 17.301 0.022
1999:
Fourth Quarter $17.618 $14.764 $0.009
Third Quarter 17.663 14.674 0.009
Second Quarter 15.036 10.326 0.009
First Quarter 10.870 7.428 0.009
</TABLE>
During 2000, Dynegy paid quarterly cash dividends on its common stock of $0.022
per share in the first quarter and $0.075 per share for each of the second,
third and fourth quarters. Dynegy intends to continue to pay a quarterly cash
dividend of $0.075 per common share, subject to the availability of funds
legally available therefor and declaration by the Board of Directors.
<PAGE>
DYNEGY FORM 10-K
26
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information presented below was derived from, and is
qualified by reference to, the Consolidated Financial Statements of the Company,
including the Notes thereto, contained elsewhere herein. The selected financial
information should be read in conjunction with the Consolidated Financial
Statements and related Notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations. Earnings (loss) per share
("EPS"), shares outstanding for EPS calculation and cash dividends per common
share are adjusted for a two-for-one stock split on August 22, 2000 and, for all
periods prior to February 1, 2000, are adjusted for the 0.69-to-one exchange
ratio in the Illinova acquisition.
DYNEGY'S SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues $29,444,876 $15,429,976 $14,257,997 $13,378,380 $7,260,202
Operating margin 1,459,085 543,875 428,687 385,294 369,500
General and administrative expenses 329,417 200,717 185,708 149,344 100,032
Depreciation and amortization expense 388,558 129,458 113,202 104,391 71,676
Asset impairment, abandonment severance and
other charges - - 9,644 275,000 -
Net income (loss) $ 500,509 $ 151,849 $ 108,353 $ (102,485) $ 113,322
Earnings (loss) per share (EPS)(3) $ 1.48 $ 0.66 $ 0.48 $ (0.49) $ 0.60
Shares outstanding for EPS calculation 314,630 230,426 227,155 207,901 187,817
Cash dividends per common share $ 0.25 $ 0.04 $ 0.04 $ 0.04 $ 0.04
CASH FLOW DATA:
Cash flows from operating activities $ 438,074 $ 8,839 $ 250,780 $ 278,589 $ (30,954)
Cash flows from investment activities (1,303,673) (318,664) (295,082) (510,735) (111,140)
Cash flows from financing activities 906,500 326,688 49,622 204,984 176,037
OTHER FINANCIAL DATA:
EBITDA(3) $ 1,430,148 $ 450,780 $ 363,517 $ 291,899 $ 289,023
Dividends or distributions to partners, net (111,904) (8,115) (7,988) (7,925) (6,740)
Capital expenditures, acquisitions and
investments(4) (2,111,755) (448,522) (478,464) (1,034,026) (859,047)
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
($ IN THOUSANDS) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(2):
Current assets $10,150,261 $2,805,080 $2,117,241 $2,018,780 $1,936,721
Current liabilities 9,404,995 2,538,523 2,026,323 1,753,094 1,548,987
Property and equipment, net 6,707,074 2,017,881 1,932,107 1,521,576 1,691,379
Total assets 21,406,438 6,525,171 5,264,237 4,516,903 4,186,810
Long-term debt 3,432,500 1,333,926 1,046,890 1,002,054 988,597
Total equity 3,597,920 1,309,482 1,128,063 1,019,125 1,116,733
</TABLE>
- ------------------------------
(1) The Illinova acquisition, which involved the acquisition of Ilinova
Corporation effective January 1, 2000, was accounted for 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 beginning on the acquisition's effective date. The
Destec acquisition, which involved the acquisition of Destec Energy, Inc.
effective July 1, 1997, was accounted for in accordance with the purchase
method of accounting, and the results of operations attributed to the
acquired
<PAGE>
DYNEGY FORM 10-K
27
business are included in the Company's financial statements and operating
statistics beginning on the acquisition's effective date. The Chevron
combination, which involved the contribution by Chevron of all of its
midstream and certain other assets in exchange for Dynegy Common and
Participating Preferred Stock and indebtedness 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.
(2) The Illinova acquisition, Destec acquisition and Chevron combination 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.
(3) 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.
(4) Includes all value assigned to 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.
<PAGE>
DYNEGY FORM 10-K
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPANY PROFILE
Dynegy Inc. ("Dynegy" or the "Company") is a leading provider of energy and
communications solutions to customers in North America, the United Kingdom and
Continental Europe. The Company's expertise extends across the entire
convergence value chain, from broadband, power generation and wholesale and
direct commercial and industrial marketing and trading of power, natural gas,
coal, emission allowances, and weather derivatives to transportation, gathering
and processing of NGLs. The Company also is involved in the transmission and
distribution of electricity and natural gas and provides retail service to
electric and gas consumers.
BUSINESS SEGMENTS
Dynegy's operations are reported in four segments: Dynegy Marketing and Trade
("DMT"), Dynegy Midstream Services ("DMS"), Transmission and Distribution and
Dynegy Global Communications ("DGC"). DMT is actively engaged in value creation
through marketing and trading of natural gas, power, coal and emissions
allowances and the generation of electricity. DMS consists of the Company's
North American midstream liquids operations, global liquefied petroleum gas
transportation and NGL marketing operations. Dynegy's Transmission and
Distribution segment includes the operations of IP, a natural gas and electric
utility in Illinois. DGC was formed subsequent to the acquisition of Extant on
September 29, 2000. DGC contributed most of the assets of the former Extant to a
limited partnership called Connect of which it owns an 80 percent general
partner interest. In addition to its interest in Connect, DGC will pursue other
communications opportunities, such as the recently completed acquisition of
iaxis, as it seeks to develop a world-wide bandwidth marketing and trading
operation.
BUSINESS RISK - MANAGEMENT ASSESSMENT
Dynegy's operations and periodic returns are impacted by a myriad of factors,
some of which may not be fully mitigated by risk-management methods. These risks
include, but are not limited to, commodity price, interest rate and foreign
exchange rate fluctuations, weather patterns, counterparty risk, operational
risks, environmental risks, management estimations, strategic investment
decisions, changes in competition and changes in regulation.
The Company is exposed to commodity price variability related to substantially
all core marketing and trading businesses. In addition, fuel requirements at its
power generation and gas processing facilities introduce additional commodity
price risk
<PAGE>
DYNEGY FORM 10-K
29
to the Company. Dynegy routinely utilizes fixed-price forward purchase and sales
contracts, futures and option contracts traded on the New York Mercantile
Exchange and swaps and options traded in the over-the-counter financial markets
to:
- - Manage and hedge its fixed-price purchase and sales commitments;
- - Provide fixed-price commitments as a service to its customers and suppliers;
- - Reduce its exposure to the volatility of cash market prices;
- - Protect its investment in storage inventories; and
- - Hedge fuel requirements at its gas processing and power generation
facilities.
Dynegy generally attempts to balance its fixed-price physical and financial
purchase and sale commitments in terms of contract volumes and the timing of
performance and delivery obligations. However, the Company may, at times, have a
bias in the market, within guidelines established by management and Dynegy's
Board of Directors, resulting from the management of its portfolio. In addition,
as a result of marketplace illiquidity and other factors, the Company may, at
times, be unable to fully hedge its portfolio for certain market risks.
Management continually 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.
Substantially all of the operations of the Company's world-wide gas marketing,
power marketing and certain liquids marketing operations are accounted for under
a mark-to-market accounting methodology. Under mark-to-market accounting, the
Company records its energy trading activities at fair value as of each balance
sheet date and recognizes the net gains or losses resulting from the revaluation
of these contracts in its results of operations. 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.
These mathematical models utilize historical market data and other factors to
forecast future prices and are used to value commitments that reside outside
liquid market quotations. As with pricing curves derived from quoted market
prices, 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. Although Dynegy believes that its mathematical models
utilize state-of-the-art technology and pertinent industry data in forecasting
long-dated pricing curves, there can be no assurance that actual cash returns
will not vary materially from those
<PAGE>
DYNEGY FORM 10-K
30
estimated through application of such models.
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 and ensures
compliance with Dynegy's risk-management policies. Risk measurement is also
practiced daily against the Dynegy portfolios with Value at Risk, stress testing
and scenario analysis on the commercial profiles.
In addition to risks associated with price or interest rate movements, credit
risk also is inherent in the Company's operations. Credit risk relates to the
risk of loss resulting from nonperformance of contractual obligations by a
counterparty. Dynegy maintains credit policies with regard to its
counterparties, which management believes minimize its overall credit risk.
However, there can be no assurance that such policies will protect the Company
against all losses from nonperformance by counterparties.
Dynegy's stated business strategy is to expand ownership or control of merchant
generation capacity in select, regionally diverse markets. 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 of volatility in periodic
returns from the Company's generating assets by increasing its exposure to
variability in anticipated demand resulting from:
- - Changing weather patterns;
- - Deregulation of the power markets;
- - Unexpected delays in industry-wide construction of new capacity;
- - Unforeseen supply constraints or bottlenecks resulting from transmission
failures or other factors;
- - Unforeseen new technologies; and
- - Other similar factors.
Dyengy's entire generation portfolio is subject to commodity price risk relating
both to the price of electricity sold and the unhedged cost of the fuel used to
generate the electricity. Additionally, in executing the Merchant Leverage
Effect, the financial performance and cash flow derived from certain generating
capacity (e.g., merchant peaking facilities) is impacted annually, either
favorably or unfavorably, by changes in and the relationship between the costs
of the commodity fueling the facilities and electricity prices, which in turn
influences the volume of electricity generated by these assets.
Finally, as Dynegy executes its strategic plan, the risk of earnings volatility
may increase due to unanticipated generation
<PAGE>
DYNEGY FORM 10-K
31
capacity exposure. As a result of supply contracts routine in the industry,
Dynegy's exposure relating to asset performance resides not only with owned and
controlled assets, but also with third-party operated facilities. The volatility
of earnings, either 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 emphasis on the physical
generation of electricity as a percentage of Dynegy's overall portfolio and
strategy may substantially alter Dynegy's earnings risk profile over time.
Investment in generation assets may increase exposure to environmental and
statutory laws and regulations. These exposures could result in increased
capital improvement and/or environmental remediation expenditures to comply with
governmental requirements. These expenditures could reduce the availability of
discretionary capital to be employed in executing Dynegy's strategic plan.
Operating results associated with natural gas gathering, processing and
fractionation activities are sensitive to changes in natural gas and NGL prices
and the availability of inlet volumes. Unhedged natural gas prices represent a
variable cost fuel component in both the natural gas processing and
fractionation businesses. Variability in NGL prices may impact revenue derived
from the sale of liquids processed by our upstream operations. The impact from
changes in NGL prices on these operations results principally from the nature of
contractual terms under which natural gas is processed and products are sold. In
addition, similar to peaking electricity generating facilities, straddle
processing plants are impacted by changes in, and the relationships between,
natural gas and NGL prices, which in turn influences the volumes of gas
processed at these facilities. Industry-wide fluctuations in straddle plant
production creates variability in volumes available for fractionation, which in
turn impacts, either favorably or unfavorably, the operating margin derived from
our fractionation operations. 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. Commodity price volatility
may also affect operating margins derived from the Company's NGL marketing
business.
Operating results in the transmission and distribution business may be impacted
by commodity price fluctuations resulting from purchases of electricity used in
supplying service to its customers. IP has
<PAGE>
DYNEGY FORM 10-K
32
contracted for volumes from various suppliers under contracts having various
terms. Certain of these contracts do not obligate the supplier to provide
replacement power to IP in the event of a curtailment or shutdown of operating
facilities. If the commodity volumes supplied from these agreements are
inadequate to cover IP's native load, the Company will be required to purchase
its supply needs in open-market purchases at prevailing market prices. Such
purchases would expose IP to commodity price risk. However, management believes
that these arrangements provide a significant, stable supply of electricity that
will allow it to effectively manage customer needs and reduce the risk of
short-term supply shortages during periods of peak demand. Price risk associated
with gas retail distribution operations of IP is mitigated through contractual
terms applicable to the business, as allowed by the ICC. IP applies prudent
risk-management practices to minimize these market risks.
Many of the risks described above are outside the control of Dynegy, and, as a
result, management's application of risk-management methods and/or state-of-the-
art operating methods may not fully mitigate these exposures.
SEASONALITY
Dynegy's revenues 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 NGLs. Natural gas sales volumes
and operating margin have historically been higher in the winter months than in
the summer months, reflecting increased demand due to greater heating
requirements and, typically, higher natural gas prices. Conversely, power
marketing operations and electricity generating facilities have higher
volatility and demand, respectively, in the summer cooling months, while the
transmission and distribution business has higher seasonal gas sales in the
winter and higher seasonal electricity sales in the summer. These trends may
change over time as demand for natural gas increases in the summer months as a
result of increased gas-fired electricity generation. DMS' businesses are also
subject to seasonal factors; however, such factors typically have a greater
impact on sales prices than on sales volumes.
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 NGL marketing businesses. The Company's energy convergence strategies are
focused on marketing, trading and arbitrage opportunities involving natural gas
and power, centered around the control and optimization of Btu conversion
capacity within the wholesale gas and power businesses (a.k.a.,
<PAGE>
DYNEGY FORM 10-K
33
"Merchant Leverage Effect"). For the foreseeable future, the Company's primary
capital expenditure focus will be the acquisition and/or construction of
merchant power generating assets that will enable the Company to fully realize
the Merchant Leverage Effect of commercialization of these generating assets.
The Company also anticipates future capital expenditures associated with the
world-wide development and implementation of network and connectivity solutions
relating to bandwidth communications strategy in the converging energy and
communications marketplace.
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 and equity issuances for its
liquidity and capital resource requirements. At December 31, 2000, the Company's
various credit agreements totaled $2.0 billion. Of this credit capacity, $300
million, $1.4 billion and $300 million was authorized for use by Dynegy,
Holdings and IP, respectively. After consideration of outstanding commercial
paper and letters of credit, the unused borrowing capacity under the credit
agreements at December 31, 2000 approximated $300 million, $1.1 billion and $152
million for Dynegy, Holdings and IP, respectively. As of March 9, 2001, the
unused borrowing capacities were $300 million, $400 million and $31 million for
Dynegy, Holdings and IP, respectively. The change in Holdings' capacity reflects
the closing of the acquisition of generation facilities in the Northeast in
January 2001.
Approximately $1.2 billion of shelf availability remains under outstanding
registration statements consisting of $470 million at Dynegy Inc. and $750
million at Holdings. The shelf availability may be used for general corporate
purposes. Management believes additional financing arrangements can be obtained
at reasonable terms, if required.
Pursuant to and as a result of the Illinova acquisition, the Company's capital
structure underwent substantial changes during 2000. Dynegy has reconstituted
its capital structure to pre-Illinova acquisition levels through a series of
transactions, which included over $1 billion of proceeds from offerings of
Common Stock, $856 million of proceeds from the disposition of certain
non-strategic assets and $850 million of proceeds from the sale of a minority
interest in Illinova's unregulated generation assets.
Dynegy sold approximately 22.6 million shares of common equity during 2000. The
offerings included approximately 18.4 million shares of Class A Common Stock
sold to the public and approximately 4.2 million shares of Class B Common Stock
sold to Chevron in private transactions, pursuant to Chevron's existing
shareholder
<PAGE>
DYNEGY FORM 10-K
34
rights. Total net proceeds to Dynegy from these sales approximated $858 million.
This amount is net of underwriting commissions and expenses of approximately
$10.1 million. Additionally, Chevron purchased $200 million of Class B Common
Stock concurrent with the acquisition of Illinova. Proceeds from the offerings
were used to reduce commercial paper borrowings and to finance the Company's
development and acquisition program.
OTHER MATTERS
RECENT ACQUISITIONS. In the first quarter of 2001, we completed the acquisition
of the Central Hudson power generation facilities in New York. The Central
Hudson facilities consist of a combination of base load, intermediate and
peaking facilities aggregating 1,700 MW. The facilities are located
approximately 50 miles north of New York City. The purchase price for the
Central Hudson facilities was $903 million, plus certain working capital
adjustments.
Also in the first quarter of 2001, Dynegy finalized the acquisition of iaxis, a
London-based communications company, having optical equipment, co-location and
hub sites throughout Europe.
PENDING ACQUISITION. Dynegy and NRG Energy, Inc. have agreed to purchase 1,330
MW of power generation facilities from Sierra Pacific Resources, including the
740 MW gas-fired Clark Generating Station and 590 MW of the 605 MW, coal-fired
Reid Gardner generating station. These facilities currently serve the growing
Las Vegas, Nevada market. The asset purchase price is $634 million, subject to
adjustments.
Closing of this transaction is subject to approval by various state and federal
regulatory bodies, which primarily include the Public Utility Commission of
Nevada, the United States Department of Justice Antitrust Division and the FERC.
In early March 2001, in response to the power impasse in the western United
States, the Public Utilities Commission of Nevada announced a decision to begin
proceedings to prevent the sale of generating assets in that state. Given the
regulatory environment in Nevada, there can be no assurance appropriate
approvals will be received and that the purchase will be consummated.
ACQUISITION, CONSTRUCTION PROJECTS AND OTHER. Included in the 2001 budget is
approximately $2.5 billion approved for construction projects in progress,
identified asset acquisitions, maintenance capital projects, environmental
projects, technology infrastructure and software enhancements, contributions to
equity investments, leveraged leases, synthetic leases and certain discretionary
capital investment funds. The capital budget is subject to revision as
opportunities arise or circumstances change. Funds approved to be spent for the
aforementioned items by the various segments in 2001 are as follows:
<PAGE>
DYNEGY FORM 10-K
35
CAPITAL BUDGET FOR 2001
<TABLE>
<CAPTION>
Estimated
Segment Capital
($ in millions) Spending
- -------------------------------------------
<S> <C>
Dynegy Marketing and Trade $1,751
Dynegy Midstream Services 124
Transmission and Distribution 160
Dynegy Global Communications 257
Information Technology
Infrastructure and Software
and Other 189
- -------------------------------------------
$2,481
- -------------------------------------------
</TABLE>
COMMITMENTS AND CONTINGENCIES. See Item 8, Financial Statements and
Supplementary Data, Note 11, which is incorporated herein by reference, for a
discussion of the Company's Commitments and Contingencies.
CALIFORNIA MARKET. Since the fourth quarter of 2000, the power and natural gas
markets in California have experienced substantial volatility driven by a
fundamental imbalance in supply and demand and the retail electricity price caps
imposed on the state's two largest utilities. Both Pacific Gas & Electric
Company and Southern California Edison Company have defaulted on payments to the
California Independent System Operator (the "ISO") and the California Power
Exchange (the "PX") as well as other creditors. As a result, the credit rating
of both utilities has been cut to non-investment grade status, and the ISO and
PX have defaulted on payments to power generators, including West Coast Power
LLC ("West Coast Power"), the entity which owns Dynegy's affiliated power plants
in the state. In addition, gas supplies to the state have been tight as
reflected in historic highs in the basis differential between California and
other markets.
Dynegy, as a leading wholesale trader and in-state generator, has joined other
industry representatives, the Governor of California, the state legislature, the
California Public Utility Commission, consumer groups, the FERC and other
affected parties in an effort to resolve, on a long-term basis, the fundamental
market imbalance which has led to this market crisis. State officials and the
ISO have relied on applicable tariffs and other legislation to require in-state
generators to generate electricity to meet emergency conditions in the state.
The State of California, through legislation appropriating funds for power
purchases by the Department of Water Resources (the "DWR"), has entered the
market as a purchaser of electricity for resale to the utilities. The DWR in
recent weeks has begun entering into multi-year power purchase contracts with
in-state generators. Discussions around a long-term solution to the California
power crisis remain ongoing, and we continue to actively participate in such
discussions.
Dynegy and NRG Energy each owns 50 percent of West Coast Power. Dynegy's net
interest in West Coast Power represents approximately 1,400 MW of generating
capacity. Dynegy also participates in the California markets as a wholesale
marketer and trader of gas and power.
<PAGE>
DYNEGY FORM 10-K
36
Management has closely monitored developments in California in an effort to
manage our credit risk in these markets. Through our interest in West Coast
Power, we have credit exposure to the ISO and PX, which primarily rely on
receipts from California utilities to pay their bills. At February 28, 2001,
Dynegy's portion of the receivables owed to West Coast Power by the ISO and PX
was approximately $265 million. West Coast Power also sells directly to the DWR
and pursuant to other bilateral agreements. In addition to its interest in West
Coast Power, Dynegy has direct sales into California. Substantially all of our
receivables for such direct sales represent either gas sales made under
securitized arrangements or power sales to the DWR. Management is continually
assessing Dynegy's exposure relative to its California receivables and has
established reserves to reflect market uncertainties.
Since mid-February, West Coast Power has sold a substantial portion of its power
either to the DWR or pursuant to commitments to other wholesale parties. On
March 6, 2001, Dynegy announced that subsidiaries of West Coast Power had
entered into an agreement to sell power to the DWR through 2004. The agreement,
which became effective on the date it was announced, provides for sales by West
Coast Power's subsidiaries of an aggregate of 1,000 MW through the remainder of
2001 and up to 2,300 MW from January 1, 2002 through 2004.
The FERC has jurisdiction over the sales for resale of electricity in interstate
commerce, which includes sales into California wholesale power markets. On
December 15, 2000, FERC issued an order that, among other things, applied a
"soft" price cap of $150/MW hour to such sales to the PX and ISO. The "soft" cap
allowed prices to exceed $150/MW hour when justified by costs. On March 9, 2001,
FERC issued an order that presumptively approved prices up to $273/MW hour
during January 2001 based on FERC's calculation of the marginal cost of
producing power in the least efficient generating unit. The order directed
electricity suppliers to either refund a portion of their January sales or
justify their prices above this approved price. The order, if finalized, would
obligate West Cost Power to refund approximately $22 million in revenues from
January. The FERC stated in its order that it would address December 2000
transactions in a separate order. This order implements a departure from
standard cost-based ratemaking and is likely to be appealed by both buyers and
sellers of power.
West Coast Power's facilities primarily are intended to operate as peaking
units. Because of the power shortage in California, these units have been
running with much greater frequency and for longer durations than is typically
the case. As the summer cooling season approaches, management must monitor the
maintenance needs of the West Coast Power
<PAGE>
DYNEGY FORM 10-K
37
facilities, as well as the availability of emission credits which are required
to operate the facilities.
The delay in payments to West Coast Power has resulted in a covenant default
under West Coast Power's bank credit facility which is non-recourse to Dynegy.
West Coast Power has been in active discussions with its lenders and believes
that the default will be cured before any adverse action is taken by the
lenders. The covenant default by West Coast Power does not adversely impact any
other credit facilities or borrowing obligations of Dynegy or its subsidiaries.
DIVIDEND POLICY. In 2001, Dynegy intends to pay an annual dividend of $0.30 per
share dividend of common stock, subject to declaration by the Board of Directors
of the Company and the availability of funds legally available therefor. During
the years ended December 31, 2000, 1999 and 1998, the Company paid approximately
$111.9 million, $8.1 million and $8.0 million in cash dividends and
distributions, respectively on common and preferred stock. The 2000 amount
includes a non-recurring dividend payment of approximately $31.8 million related
to the execution of the Illinova acquisition.
There was no outstanding preferred stock at December 31, 2000.
ACCOUNTING PRONOUNCEMENTS. See Item 8, Financial Statements and Supplementary
Data, Note 3, which is incorporated herein by reference, for a discussion of
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" applicable to the Company but not adopted
until January 1, 2001.
CONCLUSION. The Company believes it will meet all foreseeable cash
requirements, including working capital, capital expenditures and debt service,
from operating cash flow, supplemented by borrowings under its various credit
facilities and equity or debt sales, if required.
<PAGE>
DYNEGY FORM 10-K
38
RESULTS OF OPERATIONS
The following table reflects certain financial and operating data for the
Company's business segments for the years ended December 31, 2000, 1999 and
1998, respectively.
DYNEGY'S FINANCIAL DATA
<TABLE>
<CAPTION>
Dynegy Dynegy Transmission
Marketing Midstream and Dynegy Global
(In thousands) & Trade Services Distribution Communications Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
OPERATING MARGIN $ 770,413 $ 255,635 $ 432,583 $ 454 $ 1,459,085
EQUITY EARNINGS 181,589 23,823 - - 205,412
- -----------------------------------------------------------------------------------------------------
FINANCIAL CONTRIBUTION 952,002 279,458 432,583 454 1,664,497
DEPRECIATION AND AMORTIZATION (125,491) (105,090) (155,461) (2,516) (388,558)
GENERAL AND ADMINISTRATIVE (190,263) (61,318) (62,385) (15,451) (329,417)
OTHER ITEMS 140,444 (50,755) 3,448 1,931 95,068
- -----------------------------------------------------------------------------------------------------
EARNINGS BEFORE INTEREST AND
TAXES(1) $ 776,692 $ 62,295 $ 218,185 $(15,582) $ 1,041,590
NET INCOME $ 440,170 $ 19,458 $ 53,145 $(12,264) $ 500,509
RECURRING NET INCOME(2) $ 355,070 $ 54,540 $ 55,080 $(12,264) $ 452,426
1999
Operating Margin $ 283,594 $ 260,281 $ - $ - $ 543,875
Equity Earnings 62,185 17,669 - - 79,854
- -----------------------------------------------------------------------------------------------------
Financial Contribution 345,779 277,950 - - 623,729
Depreciation and Amortization (35,116) (94,342) - - (129,458)
General and Administrative (128,260) (72,457) - - (200,717)
Other Items 26,068 1,700 - - 27,768
- -----------------------------------------------------------------------------------------------------
Earnings Before Interest and
Taxes(1) $ 208,471 $ 112,851 $ - $ - $ 321,322
Net Income $ 106,631 $ 45,218 $ - $ - $ 151,849
Recurring Net Income(2) $ 100,866 $ 45,218 $ - $ - $ 146,084
1998
Operating Margin $ 236,275 $ 192,412 $ - $ - $ 428,687
Equity Earnings 75,242 15,796 - - 91,038
- -----------------------------------------------------------------------------------------------------
Financial Contribution 311,517 208,208 - - 519,725
Depreciation and Amortization (29,026) (84,176) - - (113,202)
General and Administrative (110,543) (75,165) - - (185,708)
Impairment, Abandonment and
Other (2,723) (6,921) - - (9,644)
Other Items 4,181 34,963 - - 39,144
- -----------------------------------------------------------------------------------------------------
Earnings Before Interest and
Taxes(1) $ 173,406 $ 76,909 $ - $ - $ 250,315
Net Income $ 90,750 $ 17,603 $ - $ - $ 108,353
Recurring Net Income(2) $ 92,520 $ 4,993 $ - $ - $ 97,513
</TABLE>
- ------------------------------
(1) EBIT equals pretax earnings before deduction of interest expense.
(2) Recurring Net Income adjusts Net Income for identified non-recurring items
described in the following narrative of the three year results.
<PAGE>
DYNEGY FORM 10-K
39
<TABLE>
<CAPTION>
DYNEGY'S OPERATING DATA
2000 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DYNEGY MARKETING AND TRADE:
Domestic Gas Marketing Volumes (Bcf/d)(1) 7.5 6.5 5.9
Canadian Gas Marketing Volumes (Bcf/d)(2) 2.2 2.3 2.3
European Gas Marketing Volumes (Bcf/d)(3) 1.2 1.1 0.7
- ---------------------------------------------------------------------------------------------
Total Gas Marketing Volumes 10.9 9.9 8.9
- ---------------------------------------------------------------------------------------------
Million Megawatt Hours Generated - Gross 35.7 21.5 15.9
Million Megawatt Hours Generated - Net 28.6 12.8 9.8
Million Megawatt Hours Sold 109.1 66.5 120.8
- ---------------------------------------------------------------------------------------------
Total Produced and Sold 137.7 79.3 130.6
- ---------------------------------------------------------------------------------------------
Average On-Peak Market Power Prices:
Cinergy $ 36.43 $ 51.40 $ 57.43
TVA 39.73 51.96 56.76
PJM 39.96 38.29 28.74
CALPX SP15 113.51 31.99 31.17
DYNEGY MIDSTREAM SERVICES:
Natural Gas Processing Volumes (MBbls/d):
Field Plants 61.2 85.9 91.8
Straddle Plants 35.6 36.6 30.9
- ---------------------------------------------------------------------------------------------
Total Natural Gas Processing Volumes 96.8 122.5 122.7
- ---------------------------------------------------------------------------------------------
Fractionation volumes (MBbls/d) 224.3 210.9 192.5
Natural Gas Liquids Sold (MBbls/d) 564.6 537.1 483.6
Average Commodity Prices:
Natural Gas - Henry Hub (First of the Month) ($/MMBtu) $ 3.89 $ 2.29 $ 2.11
Crude Oil - Cushing ($/Bbl) 28.97 17.10 11.97
Natural Gas Liquids ($/Gal) 0.55 0.34 0.25
TRANSMISSION AND DISTRIBUTION:(4)
Electric Sales in KWH (Millions):
Residential 5,046 4,949 4,893
Commercial 4,272 4,173 4,053
Industrial 9,271 8,722 8,701
Other 361 372 375
- ---------------------------------------------------------------------------------------------
Sales to Ultimate Customers 18,950 18,216 18,022
Interchange 51 6,525 16,199
- ---------------------------------------------------------------------------------------------
Total Electric Sales 19,001 24,741 34,221
- ---------------------------------------------------------------------------------------------
Gas Sales in Therms (Millions):
Residential 337 323 305
Commercial 141 134 131
Industrial 77 71 67
- ---------------------------------------------------------------------------------------------
Sales to Ultimate Customers 555 528 503
Transportation of customer-owned gas 259 270 267
Interdepartmental sales 19 27 26
- ---------------------------------------------------------------------------------------------
Total Gas Delivered 833 825 796
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Includes immaterial amounts of inter-affiliate gas sales.
(2) Represents volumes sold by Dynegy Inc.'s Canadian subsidiary.
(3) Represents volumes sold by Dynegy Inc.'s European operations.
(4) Volumes for 1999 and 1998 reflect the operations of Illinois Power Company
prior to its acquisition by Dynegy.
<PAGE>
DYNEGY FORM 10-K
40
THREE YEARS ENDED DECEMBER 31, 2000
For the year ended December 31, 2000, the Company realized net income of $500.5
million, or $1.48 per diluted share. This compares with $151.8 million, or $0.66
per diluted share, and $108.4 million, or $0.48 per diluted share, in 1999 and
1998, respectively. Recurring net income was $452.4 million, or $1.43 per
diluted share, in 2000. This compares to $146.1 million, or $0.63 per diluted
share, and $97.5 million, or $0.43 per diluted share, in 1999 and 1998,
respectively. Components of recurring net income were as follows:
COMPONENTS OF RECURRING NET INCOME
<TABLE>
<CAPTION>
2000 1999 1998
($ IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME EPS INCOME EPS INCOME EPS
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET INCOME AND EPS, AS REPORTED $500,509 $ 1.48 $151,849 $ 0.66 $108,353 $ 0.48
Gain on Sale - Accord Energy Limited(1) (58,478) (0.18) - - - -
Gain on Sale - QFs(2) (33,800) (0.11) - - - -
Loss on Sale - Crude Business(3) 9,454 0.03 - - - -
Loss on Sale - Mid-continent Assets(4) 8,551 0.03 - - - -
Impairment of a Liquids Asset(5) 16,250 0.05 - - - -
Illinova Acquisition Costs(6) 9,940 0.03 - - - -
Special Dividend(7) - 0.10 - - - -
Gain on Sale - Quicktrade Investment(8) - - (5,765) (0.03) - -
Gain on Sale - Ozark Pipeline(9) - - - - (17,109) (0.08)
Severance Charge - - - - 6,269 0.03
- ---------------------------------------------------------------------------------------------------------------
RECURRING NET INCOME AND EPS $452,426 $ 1.43 $146,084 $ 0.63 $ 97,513 $ 0.43
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company sold its 25% participating preferred interest in Accord Energy
Limited ("Accord") in the third quarter of 2000.
(2) The Company sold interests in certain QFs, pursuant to statutory
requirements related to the Illinova acquisition.
(3) The Company sold its non-strategic domestic crude oil marketing and trade
business in the first quarter of 2000.
(4) The Company disposed of its Mid-continent liquids processing assets in the
first quarter of 2000 consistent with its liquids asset divestiture
strategy.
(5) The impairment reserve is associated with a Canadian gas processing asset.
The Company expects to sell this asset in the first quarter of 2001.
(6) Amounts relate to non-capitalizable merger related costs associated with the
Illinova acquisition.
(7) The special dividend relates to amounts paid to certain shareholders
pursuant to the execution of the Illinova acquisition.
(8) Gain relates to the disposition of a non-strategic investment sold in the
first quarter of 1999.
(9) Gain relates to the monetization of a gas pipeline, not considered
consistent with the Company's long-term strategy.
<PAGE>
DYNEGY FORM 10-K
41
Revenues in each of the three years in the period ended December 31, 2000,
totaled $29.4 billion, $15.4 billion and $14.3 billion, respectively. Operating
cash flows totaled $438 million for the year ended December 31, 2000, compared
with $9 million in 1999 and $251 million in 1998.
The 2000 results compare favorably to recurring net income reported in both 1999
and 1998, principally reflecting the substantial growth in DMT's operations,
substantial increased volatility in key commodities impacting trading
operations, successful execution of the Company's liquids asset divestiture
strategy and enhanced technology solutions available to the Company's customers
and employees. The 2000 period reflects successful execution of the Merchant
Leverage Effect strategy, which allowed Dynegy to capitalize on arbitrage
opportunities presented by its geographically diverse asset portfolio and strong
marketing, structured origination activity and term sales. Integral to these
results was the successful integration of the generation and transmission and
distribution businesses acquired in the Illinova acquisition and the realization
of substantially all of the associated acquisition synergies. The midstream
segment also had a successful 2000 period due principally to successful
execution of its favorable commodity-pricing environment and ongoing cost
savings initiatives.
The impact of acquisition and disposition activity during the three-year period
reduces the comparability of certain historical financial and volumetric data.
This is especially true as it relates to power generation, gas processing and
transmission and distribution volumes and to certain financial data associated
with the operations purchased in the Illinova acquisition and the financial
results reflected in the DGC segment.
Consolidated operating margin for each of the three years in the period ended
December 31, 2000 totaled $1.5 billion, $543.9 million and $428.7 million,
respectively. For the year ended December 31, 2000, the Company reported
operating income of $741.1 million, compared with operating income of $213.7
million and $120.1 million for the 1999 and 1998 periods, respectively. The
substantial annual growth in operating margin during the three-year period
reflects the financial impact of the factors described previously and is
partially offset by higher depreciation and amortization and general and
administrative expenses. Increases in depreciation and amortization expense
during the three-year period reflect the impact of the depreciable assets
acquired in the Illinova acquisition, continued expansion of the Company's
depreciable asset base, principally in DMT's segment, the impairment of certain
liquids assets in 2000 and capitalized costs associated with enhanced
information technology infrastructure. The increased level of general and
administrative expenses period-to-
<PAGE>
DYNEGY FORM 10-K
42
period reflects the infrastructure required to support a larger, more diverse
operation. Increased overhead costs are primarily a result of expansion through
acquisition, including the Illinova and Extant acquisitions, net of realized
merger-related synergies, that were completed in 2000. Additionally, variable
compensation costs were higher in 2000 as compared with both 1999 and 1998
periods.
Incremental to Dynegy's consolidated results was the Company's share in the
earnings of its unconsolidated affiliates, which contributed approximately
$205.4 million, $79.9 million and $91.0 million in 2000, 1999 and 1998,
respectively. Increases in equity earnings in 2000 reflect returns on recent
investments in regionally diverse power generation joint ventures, partially
offset by the sale of certain qualifying facilities pursuant to statutory
requirements associated with the Illinova acquisition. Equity earnings were
lower in 1999 than in 1998 principally as a result of changes in weather-driven
demand in the power generation investment group. During 2000, the Company
disposed of its investment in Accord for a substantial gain. This entity
provided equity earnings of approximately $21 million in 1999 and $22 million in
1998 periods. Accord, formed in 1994, represented Dynegy's initial gas marketing
operation in the United Kingdom. The investment was no longer strategic to
Dynegy as a result of the Company's direct expansion into the European gas and
power marketing industries. Cash distributions received from these investments
during each of the three years in the period ended December 31, 2000
approximated $118 million, $66 million and $85 million, respectively.
Interest expense totaled $251.3 million for the year ended December 31, 2000,
compared with $78.2 million and $75.0 million for the comparable 1999 and 1998
periods, respectively. The increase in interest expense in 2000 is attributable
to the increased indebtedness resulting from the acquisition of Illinova, both
in terms of Illinova indebtedness assumed in the transaction and principal
borrowed to effect the transaction. Additionally, interest rates on the variable
rate borrowings were higher in 2000 as a result of market movements in such
rates. Accumulated distributions associated with trust preferred securities and
preferred stock of a wholly owned subsidiary totaled $29.2 million in 2000 and
$16.6 million for each of the years ended December 31, 1999 and 1998.
Other income and expenses, net benefited operating results in each of the three
years in the period ended December 31, 2000, by $95.1 million, $27.8 million and
$39.1 million, respectively. The variability in these amounts principally
reflects the pre-tax effect of certain of the previously disclosed non-recurring
items. The remaining net amounts for all three years include other numerous less
significant
<PAGE>
DYNEGY FORM 10-K
43
recurring and non-recurring income and expense items, as well as the financial
effects of minority shareholder investment in some of our operations.
The Company reported an income tax provision of $260.6 million in 2000, compared
to income tax provisions of $74.7 million and $50.3 million in 1999 and 1998,
respectively. These amounts reflect effective rates of 34 percent, 33 percent
and 32 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. See Item 8, Financial Statements and
Supplementary Data, Note 8, which is incorporated herein by reference.
DYNEGY MARKETING AND TRADE
DMT reported recurring segment net income of $355.1 million for the year ended
December 31, 2000, compared with recurring net income of $100.9 million and
$92.5 million for the years ended December 31, 1999 and 1998, respectively.
Non-recurring items included in the 2000 segment results include the gains on
sale of Accord and the QF interests partially offset by an allocated portion of
the Illinova acquisition costs. Included in 1999 segment reported net income is
the gain on sale of the Quicktrade investment. Included in 1998 reported segment
net income earnings is an allocation of severance costs.
Recurring results of operations during the three-year period were influenced
either positively or negatively by:
- - New, regionally diverse merchant power generating capacity acquired or placed
in service in 2000;
- - Weather-influenced seasonal demand variability;
- - Significantly increased commodity price volatility in 2000 as compared with
the other periods;
- - Expansion of gas and power marketing and trading in Continental Europe in
late 1999 and 2000;
- - Substantially larger base of operations in 2000 resulting principally from
the Illinova acquisition causing increased depreciation and overhead
expenses;
- - Expanded investment in power generation joint ventures;
- - Disposition of Accord; and
- - Enhanced technology solutions, including DynegyDIRECT.
Total electric power produced and sold during 2000 aggregated 137.7 million
megawatt hours compared to 79.3 million and 130.6 million megawatt hours during
1999 and 1998, respectively. The 2000 volumes reflect the impact of additional
generating capacity and improved price volatility period-over-period. The 1999
amount is particularly low due to lower weather-driven demand for electricity in
<PAGE>
DYNEGY FORM 10-K
44
that period. Total natural gas volumes sold increased to 10.9 billion cubic feet
per day from 9.9 billion cubic feet per day in 1999 and 8.9 billion cubic feet
per day in 1998. The increase in natural gas volumes sold reflects the increased
demand by gas-fired generation, expanding European operations and greater
volumes sold to Dynegy's retail alliances.
DYNEGY MIDSTREAM SERVICES
DMS reported recurring net income of approximately $54.5 million for the year
ended December 31, 2000 compared with recurring net income of $45.2 million and
$5.0 million in 1999 and 1998, respectively. Non-recurring items included in the
2000 segment results include losses on sales of the crude oil marketing and
trade business and Mid-continent gas processing assets, as well as the
impairment of a Canadian gas processing asset. Non-recurring items in 2000 also
included an allocation of certain merger-related costs. The 1998 segment results
included the gain on the Ozark sale and an allocation of the severance costs.
Recurring results of operations during the three-year period were influenced
either positively or negatively by:
- - Substantial focus on lowering costs throughout the Liquids Value Chain during
the three-year period;
- - NGL commodity prices in 2000, and the volatility associated therewith, were
generally improved over 1999 and 1998 levels;
- - The sale of approximately one-third of Dynegy's domestic upstream natural gas
processing assets in late 1999 and early 2000;
- - Fluctuating world-wide demand for NGLs, particularly in Europe and Asia,
enhancing revenues from global marketing operations; and
- - The domestic Crude Oil Marketing and Trade business, which was sold April 1,
2000, contributed $13.6 million and $9.1 million in 1999 and 1998,
respectively.
In addition, the country experienced tightness in propane supplies at storage
facilities in 2000 in the market areas resulting from high demand due to
persistent cold weather conditions which led to regional supply disruptions.
Dynegy was able to provide all committed product to its customers, emerging as
the supplier of choice in many markets.
Average domestic NGL processing volumes totaled 97 MBbls/d in 2000 compared to
an average of 123 MBbls/d in each of 1999 and 1998. Lower volumes processed in
2000 reflect the aforementioned dispositions of non-strategic assets and the
impact of market conditions on straddle plant production during the three-year
period. Volumes processed in 2000 were flat with volumes processed in 1999,
after adjusting for the effects of the asset sales. NGL marketing volumes in
2000 reflect the robust demand and volatile pricing environment during that
period. NGL market
<PAGE>
DYNEGY FORM 10-K
45
prices during 2000 averaged $0.55 per gallon compared to $0.34 per gallon and
$0.25 per gallon in 1999 and 1998, respectively.
TRANSMISSION AND DISTRIBUTION
The Transmission and Distribution segment was formed at the beginning of 2000
and reflects the operations of IP acquired in the Illinova acquisition. The
segment reported net income of approximately $53.1 million in 2000, which
included an approximate $1.9 million after-tax non-recurring merger cost charge.
Recurring results of operations for this segment reflect a weather-related lack
of demand for services throughout the 2000 period. Cost synergies and improved
efficiencies achieved in the segment offset the lower-than-anticipated revenue
targets.
DYNEGY GLOBAL COMMUNICATIONS
This segment was formed at the beginning of the fourth quarter of 2000 and had a
$12.3 million net loss for the year resulting from start-up investments
associated with the expansion of the Company's global communications business.
This segment reflects the domestic operations acquired in the acquisition of
Extant, which was completed on September 29, 2000. The segment also incurred
fourth quarter costs associated with start-up activities underway related to the
acquisition of iaxis, which closed in the first quarter of 2001. The segment
also includes bandwidth trading and marketing operations and communications
operations in the Far East, headquartered in Hong Kong.
OPERATING CASH FLOW
Cash flow from operating activities totaled $438 million during the year ended
December 31, 2000 compared to $9 million during 1999 and $251 million during
1998. Cash flow from operating activities before changes in working capital
totaled $532 million during the year ended December 31, 2000 compared to $160
million during 1999 and $225 million during 1998. Increases in operating cash
flow in 2000 primarily reflect higher net income, decreased investment in
inventories and higher non-cash expenses such as depreciation and deferred
taxes. Also significant to 2000 operating cash flow is the impact of non-cash
risk-management activities, which reflect the significant market volatility in
the 2000 period as well as successful execution of our global convergence
business strategy. The low operating cash flow in 1999 primarily reflected
increased investment in inventory and growing trading and marketing operations
in 1999 as compared with 1998, as reflected in the 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
<PAGE>
DYNEGY FORM 10-K
46
accounts and other similar items. Fluctuations in these accounts,
period-to-period, reflect changes in the timing of payments or recognition of
liabilities and are not directly impacted by seasonal factors.
CAPITAL EXPENDITURES AND INVESTING ACTIVITIES
Investing activities in 2000 included $1.2 billion related to the acquisitions
of Illinova and Extant and $769 million in capital expenditures principally
related to construction of power generation assets, improvements of existing
facilities related to the transmission and distribution segment and investment
associated with infrastructure. Also during 2000, Dynegy made investments in
unconsolidated affiliates of $141 million. The aforementioned non-strategic
asset dispositions in 2000 principally related to the sale of certain QFs and
liquids assets for which the Company received cash inflows of approximately $856
million.
Dynegy financed the cash component of the Illinova acquisition initially with
borrowings under a credit facility and commercial paper and the issuance of $200
million of Class B Common Stock to Chevron. On a long-term basis, Dynegy
financed the acquisition of Illinova through a combination of sales of common
equity, dispositions of certain non-strategic assets, proceeds from a minority
interest contribution and from cash flow derived from its operations. Dynegy
financed the acquisition of Extant with capacity under existing lines of credit
and Class A Common Stock.
During the year ended December 31, 1999, the Company invested a net $319 million
principally in power generation assets, including a power generation
partnership, and additional expenditures related to capital improvements at
existing facilities and capital investment associated with technology
infrastructure improvements. Also during 1999, the Company sold certain DMS
assets, an investment held by DMT and a 50 percent interest in a power
generation partnership, netting proceeds of $81 million.
During the year ended December 31, 1998, the Company invested a net $295
million, principally on discrete asset acquisitions primarily focused in the DMT
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 DMS assets. Aggregate net proceeds from these dispositions
approximated $84 million.
FINANCING ACTIVITIES
Net cash inflows associated with financing activities in 2000 totaled $907
million. Approximately $1.1 billion was raised through sales of common equity,
$200 million of which includes purchases of
<PAGE>
DYNEGY FORM 10-K
47
Class B Common Stock by Chevron concurrent with the acquisition of Illinova.
Additionally, aggregate shares sold in two separate successful offerings totaled
18.4 million shares of Class A Common Stock sold to the public and approximately
4.2 million shares of Class B Common Stock sold to Chevron. The Chevron sales
were executed through private transactions, pursuant to Chevron's existing
contractual right to maintain a defined level of ownership interest in Dynegy.
Proceeds raised in these sales, net of underwriting commissions and expenses of
approximately $10.1 million, were approximately $858 million. Proceeds from the
offerings were used to reduce commercial paper borrowings and to finance
Dynegy's development and acquisition program.
During 2000, IP redeemed $93 million of tax advantaged Monthly Income Preferred
Securities.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION. Dynegy's reports,
filings and other public announcements often include statements reflecting
assumptions, expectations, projections, intentions or beliefs about future
events. These statements are intended as "forward-looking statements" under the
Private Securities Litigation Reform Act of 1995. You can identify these
statements by the fact that they do not relate strictly to historical or current
facts. They use words such as "anticipate," "estimate," "project," "forecast,"
"may," "will," "should," "expect" and other words of similar meaning. In
particular, these include, but are not limited to, statements relating to the
following:
- - Projected operating or financial results;
- - Pending or recent acquisitions, including the anticipated closing date,
expected cost savings or synergies and the accretive or dilutive impact of an
acquisition on earnings;
- - Expectations regarding transaction volume and liquidity in wholesale energy
markets in the U.S. and Europe;
- - Beliefs or assumptions about the outlook for deregulation of retail and
wholesale energy markets in the U.S. and Europe and anticipated business
developments in such markets;
- - The Company's ability to effectively compete for market share with industry
participants;
- - The expected commencement date for commercial operations for new power
plants; and
- - Anticipated developments with respect to demand for broadband services and
applications and the Company's strategic plans in connection therewith.
Any or all of Dynegy's forward-looking statements may turn out to be wrong. They
can be affected by inaccurate assumptions
<PAGE>
DYNEGY FORM 10-K
48
or by known or unknown risks and uncertainties, including the following:
- - The timing and extent of changes in commodity prices for energy, particularly
natural gas, electricity and NGLs, or communications products or services;
- - The timing and extent of deregulation of energy markets in the U.S. and
Europe and the rules and regulations adopted on a transitional basis in such
markets;
- - The condition of the capital markets generally, which will be affected by
interest rates, foreign currency fluctuations and general economic
conditions, as well as Dynegy's ability to maintain its investment grade
credit ratings;
- - The effectiveness of Dynegy's risk-management policies and procedures and the
ability of Dynegy's trading counterparties to satisfy their financial
commitments;
- - The liquidity and competitiveness of wholesale trading markets for energy
commodities, including the impact of electronic or online trading in these
markets;
- - Operational factors affecting the start up or ongoing commercial operations
of Dynegy's power generation or midstream natural gas facilities, including
catastrophic weather related damage, unscheduled outages or repairs,
unanticipated changes in fuel costs or availability, the unavailability of
gas transportation, the unavailability of electric transmission service or
workforce issues;
- - Uncertainties regarding the development of, and competition within, the
market for broadband services in the U.S. and Europe, including risks
relating to competing technologies and standards, regulation, capital costs
and the timing and amount of customer demand for high bandwidth applications;
- - Cost and other effects of legal and administrative proceedings, settlements,
investigations and claims, including environmental liabilities that may not
be covered by indemnity or insurance; and
- - Other U.S. or European regulatory or legislative developments that affect the
demand for energy generally, increase the environmental compliance cost for
Dynegy's power generation or midstream gas facilities or impose liabilities
on the owners of such facilities.
Many of these factors will be important in determining Dynegy's actual future
results. Consequently, no forward-looking statement can be guaranteed. Dynegy's
actual future results may vary materially from those expressed or implied in any
forward-looking statements.
All of Dynegy's forward-looking statements, whether written or oral, are
expressly qualified by these cautionary
<PAGE>
DYNEGY FORM 10-K
49
statements and any other cautionary statements that may accompany such forward-
looking statements. In addition, Dynegy disclaims any obligation to update any
forward-looking statements to reflect events or circumstances after the date of
this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks indigenous to its industry or
inherent in transactions entered into in the normal course of business. In
executing risk-management strategies intended to mitigate these market risks,
the Company routinely utilizes various types of financial instruments. The
absolute notional contract amounts associated with commodity risk-management,
interest rate and forward exchange contracts were as follows:
<TABLE>
<CAPTION>
December 31,
ABSOLUTE NOTIONAL CONTRACT AMOUNTS ------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas (Trillion Cubic Feet) 7.709 5.702 4.179
Electricity (Million Megawatt Hours) 162.321 42.949 1.835
Natural Gas Liquids (Million Barrels) 9.899 19.902 6.397
Weather Derivatives (in thousand Heating Degree Days) 427.423 - -
Crude Oil (Million Barrels) - 35.554 18.800
Interest Rate Swaps (in thousands of U.S. Dollars) $ - $ 36,524 $ 69,332
Fixed Interest Rate Paid on Swaps (Percent) - 8.210 8.067
U.K. Pound Sterling (in thousands of U.S. Dollars) $ 14,658 $ 85,812 $ 69,254
Average U.K. Pound Sterling Contract Rate (in U.S.
Dollars) $ 1.4658 $ 1.6191 $ 1.6143
Euro Dollars (in thousands of U.S. Dollars) $ 35,642 $ - $ -
Average Euro Dollar Contract Rate (in U.S. Dollars) $ 1.0200 $ - $ -
Canadian Dollar (in thousands of U.S. Dollars) $737,950 $288,898 $268,307
Average Canadian Dollar Contract Rate (in U.S. Dollars) $ 0.6768 $ 0.6775 $ 0.6710
</TABLE>
Cash-flow requirements for these commodity risk-management, interest rate and
foreign exchange contracts were estimated based upon market prices in effect at
December 31, 2000. Cash-flow requirements were as follows:
CASH FLOW REQUIREMENTS FOR RISK-MANAGEMENT CONTRACTS
<TABLE>
<CAPTION>
($ in millions) 2001 2002 2003 2004 2005 Beyond
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Future estimated net inflows based on year end
market prices/rates $530 $136 $73 $71 $49 $100
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Dynegy measures entity-wide market risk in its financial trading and
risk-management portfolios using Value at Risk. The quantification of market
risk using Value at Risk provides a consistent measure of risk across diverse
energy markets and products with different risk factors to set the overall
corporate risk tolerance, determine risk targets and position limits. The use of
this methodology requires a number of key
<PAGE>
DYNEGY FORM 10-K
50
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 analyses
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, 2000, the
Value at Risk for Dynegy's trading and risk-management portfolios approximated
$9.6 million and the average of such value during the year ended December 31,
2000 was estimated at $10.8 million.
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-55 inclusive, found at the end of this report, and
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
DYNEGY FORM 10-K
51
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 2001 Annual Meeting of
Stockholders (the "Proxy Statement") under the headings "Proposal 1 - Election
of Directors" and "Executive Compensation - Section 16(a) Beneficial Ownership
Reporting Compliance" and is incorporated herein by reference. The Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after December 31, 2000. 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," "Executive Compensation - Indebtedness of Management" and
"- Certain Relationships and Related Transactions" and is incorporated herein by
reference.
<PAGE>
DYNEGY FORM 10-K
52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K
(a) The following documents, which have been filed by the Company with the
Securities and Exchange Commission pursuant to the Securities Exchange Act
of 1934, as amended, are by this reference incorporated in and made a part
of this report:
1. Financial Statements - Consolidated financial statements of the Company
and its subsidiaries are incorporated under Item 8. of this Form 10-K.
2. Financial Statement Schedules - Schedule I--Incorporated under Item 8 of
this Form 10-K.
3. Exhibits - The following instruments and documents are included as
exhibits to this Form 10-K. All management contracts or compensation
plans or arrangements set forth in such list are marked with a ~.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------------------------------------------------------------------------------------------
<C> <C> <S>
2.1 - Agreement and Plan of Merger among Dynegy Inc., Illinova
Corporation and certain other parties named therein.(9)
2.2 - Amendment to Agreement and Plan of Merger among Dynegy Inc.,
Illinova Corporation and certain other parties named
therein.(12)
3.1 - Articles of Incorporation of the Company.(12)
3.2 - Articles of Amendment to the Company's Articles of
Incorporation.(12)
3.3 - Articles of Amendment to the Company's Articles of
Incorporation.(13)
3.4 - Articles of Amendment to the Company's Articles of
Incorporation.(14)
3.5 - Amended and Restated Bylaws of Dynegy Inc.(15)
4.1 - Indenture, dated as of December 11, 1995, by and among NGC
Corporation, the Subsidiary Guarantors named therein and the
First National Bank of Chicago, as Trustee.(1)
4.4 - 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.(4)
4.5 - First Amendment to Amended and Restated Credit Agreement,
dated as of 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, and the Lenders named
therein.(8)
4.6 - 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, and the Lenders named
therein.(8)
</TABLE>
<PAGE>
DYNEGY FORM 10-K
53
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------------------------------------------------------------------------------------------
<C> <C> <S>
4.7 - Subordinated Debenture Indenture between NGC Corporation and
The First National Bank of Chicago, as Debenture Trustee,
dated as of May 28, 1997.(5)
4.8 - 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.(5)
4.9 - 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.(5)
4.10 - Common Securities Guarantee of NGC Corporation dated as of
May 28, 1997.(5)
4.11 - 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.(5)
4.12 - 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.(6)
4.17 - Indenture, dated as of September 26, 1996, restated as of
March 23, 1998, between NGC Corporation and The First
National Bank of Chicago, as Trustee.(8)
4.18 - 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.(7)
4.19 - 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.(7)
4.20 - First Amendment to 364-Day Revolving Credit dated as of
May 5, 1999 among Dynegy Holdings 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.(11)
4.21 - Indenture dated February 1, 1997, between Illinova
Corporation and The First National Bank of Chicago, as
Trustee.(17)
4.22 - Distribution Agreement dated January 16, 1998, and Officers'
Certificate and Issuer Order of Illinova Corporation, dated
January 16, 1998 (with forms of Fixed Rate note and Floating
Rate note attached), delivered pursuant to the terms of the
Indenture dated as of February 1, 1997, between Illinova
Corporation and The First National Bank of Chicago.(19)
4.23 - Mortgage and Deed of Trust dated November 1, 1943.(18)
4.24 - Supplemental Indenture dated July 1, 1991, providing for
$84,710,000 principal amount of 7 3/8% First Mortgage Bonds
due July 1, 2021.(20)
4.25 - Supplemental Indenture No. 1 dated June 1, 1992.(21)
4.26 - Supplemental Indenture No. 2 dated June 1, 1992.(21)
4.27 - Supplemental Indenture No. 1 dated July 1, 1992.(21)
4.28 - Supplemental Indenture No. 2 dated July 1, 1992.(21)
</TABLE>
<PAGE>
DYNEGY FORM 10-K
54
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------------------------------------------------------------------------------------------
<C> <C> <S>
4.29 - Supplemental Indenture dated September 1, 1992, providing
for $72,000,000 principal amount of 6 1/2% First Mortgage
Bonds due September 1, 1999.(22)
4.30 - General Mortgage Indenture and Deed of Trust dated as of
November 1, 1992.(23)
4.31 - Supplemental Indenture dated February 15, 1993, to Mortgage
and Deed of Trust dated November 1, 1943.(23)
4.32 - Supplemental Indenture dated February 15, 1993, to General
Mortgage Indenture and Deed of Trust dated November 1,
1992.(23)
4.33 - Supplemental Indenture No. 1 dated March 15, 1993, to
Mortgage and Deed of Trust dated November 1, 1943.(23)
4.34 - Supplemental Indenture No. 1 dated March 15, 1993, to
General Mortgage Indenture and Deed of Trust dated
November 1, 1992.(23)
4.35 - Supplemental Indenture No. 2 dated March 15, 1993, to
Mortgage and Deed of Trust dated November 1, 1943.(23)
4.36 - Supplemental Indenture No. 2 dated March 15, 1993, to
General Mortgage Indenture and Deed of Trust dated
November 1, 1992.(23)
4.37 - Supplemental Indenture dated July 15, 1993, to Mortgage and
Deed of Trust dated November 1, 1943.(24)
4.38 - Supplemental Indenture dated July 15, 1993, to General
Mortgage Indenture and Deed of Trust dated November 1,
1992.(24)
4.39 - Supplemental Indenture dated August 1, 1993, to Mortgage and
Deed of Trust dated November 1, 1943.(24)
4.40 - Supplemental Indenture dated August 1, 1993, to General
Mortgage Indenture and Deed of Trust dated November 1,
1992.(24)
4.41 - Supplemental Indenture dated October 15, 1993, to Mortgage
and Deed of Trust dated November 1, 1943.(25)
4.42 - Supplemental Indenture dated October 15, 1993, to General
Mortgage Indenture and Deed of Trust dated November 1,
1992.(25)
4.43 - Supplemental Indenture dated November 1, 1993, to Mortgage
and Deed of Trust dated November 1, 1943.(25)
4.44 - Supplemental Indenture dated November 1, 1993, to General
Mortgage Indenture and Deed of Trust dated November 1,
1992.(25)
4.45 - Supplemental Indenture dated February 1, 1994, to Mortgage
and Deed of Trust dated November 1, 1943.(26)
4.46 - Indenture dated October 1, 1994 between Illinois Power
Company and The First National Bank of Chicago.(27)
4.47 - Supplemental Indenture dated October 1, 1994, to Indenture
dated as of October 1, 1994.(27)
4.48 - Indenture dated January 1, 1996 between Illinois Power
Company and Wilmington Trust Company.(28)
4.49 - First Supplemental Indenture dated January 1, 1996, between
Illinois Power Company and Wilmington Trust Company.(28)
4.50 - Supplemental Indenture dated April 1, 1997, to Mortgage and
Deed of Trust dated November 1, 1943.(29)
</TABLE>
<PAGE>
DYNEGY FORM 10-K
55
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------------------------------------------------------------------------------------------
<C> <C> <S>
4.51 - Supplemental Indenture dated April 1, 1997, to General
Mortgage Indenture and Deed of Trust dated November 1,
1992.(29)
4.52 - Supplemental Indenture dated December 1, 1997, to Mortgage
and Deed of Trust dated November 1, 1943.(30)
4.53 - Supplemental Indenture dated March 1, 1998, to General
Mortgage Indenture and Deed of Trust dated November 1, 1992
providing for the issuance of $18,700,000 principal amount
of 5.40% Pollution Control Bonds.(31)
4.54 - Supplemental Indenture dated March 1, 1998, to Mortgage and
Deed of Trust dated November 1, 1943 providing for the
issuance of $18,700,000 principal amount of Pollution
Control Bonds.(31)
4.55 - Supplemental Indenture dated March 1, 1998, to General
Mortgage Indenture and Deed of Trust dated November 1, 1992
providing for the issuance of $33,755,000 principal amount
of Pollution Control Bonds.(31)
4.56 - Supplemental Indenture dated March 1, 1998, to Mortgage and
Deed of Trust dated November 1, 1943 providing for the
issuance of $33,755,000 principal amount of Pollution
Control Bonds.(31)
4.57 - Supplemental Indenture dated July 15, 1998, to General
Mortgage Indenture and Deed of Trust dated November 1, 1992
providing for the issuance of $100,000,000 principal amount
of 6.25% New Mortgage Bonds.(31)
4.58 - Supplemental Indenture dated July 15, 1998, to Mortgage and
Deed of Trust dated November 1, 1943 providing for the
issuance of $100,000,000 principal amount of 6.25% First
Mortgage Bonds.(31)
4.59 - Supplemental Indenture dated September 15, 1998, to General
Mortgage Indenture and Deed of Trust dated November 1, 1992
providing for the issuance of $100,000,000 principal amount
of 6.00% New Mortgage Bonds.(31)
4.60 - Supplemental Indenture dated September 15, 1998, to Mortgage
and Deed of Trust dated November 1, 1943 providing for the
issuance of $100,000,000 principal amount of 6.00% First
Mortgage Bonds.(31)
4.61 - Supplemental Indenture dated October 1, 1998, to General
Mortgage Indenture and Deed of Trust dated November 1, 1992
providing for the transfer of Letter of Credit providers on
three series of Pollution Control Bonds totaling
$111,770,000.(31)
4.62 - Supplemental Indenture dated June 15, 1999, to Mortgage and
Deed of Trust dated November 1, 1943 providing for the
issuance of $250,000,000 principal amount of 7.50% New
Mortgage Bonds.(32)
4.63 - Supplemental Indenture dated June 15, 1999, to General
Mortgage Indenture and Deed of Trust dated November 1, 1992
providing for the issuance of 7.50% New Mortgage Bonds.(32)
4.64 - Supplemental Indenture dated July 15, 1999, to Mortgage and
Deed of Trust dated November 1, 1943 providing for the
issuance of $35,615,000 principal amount of 5.70% Series U
Pollution Control Bonds.(32)
4.65 - Supplemental Indenture dated July 15, 1999, to General
Mortgage Indenture and Deed of Trust dated November 1, 1992
providing for the issuance of $35,615,000 principal amount
of 5.70% Series U Pollution Control Bonds.(32)
4.66 - Supplemental Indenture dated July 15, 1999, to Mortgage and
Deed of Trust dated November 1, 1943 providing for the
issuance of $84,150,000 principal amount of 7.40% Series V
Pollution Control Bonds.(32)
</TABLE>
<PAGE>
DYNEGY FORM 10-K
56
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------------------------------------------------------------------------------------------
<C> <C> <S>
4.67 - Supplemental Indenture dated July 15, 1999, to General
Mortgage Indenture and Deed of Trust dated November 1, 1992
providing for the issuance of $84,150,000 principal amount
of 7.40% Series V Pollution Control Bonds.(32)
10.1 - Dynegy Inc. Amended and Restated 1991 Stock Option
Plan.~(10)
10.2 - Dynegy Inc. 1998 U.K. Stock Option Plan.~(10)
10.3 - Dynegy Inc. Amended and Restated Employee Equity Option
Plan.~(10)
10.4 - Dynegy Inc. 1999 Long Term Incentive Plan.~(15)
10.5 - Dynegy Inc. 2000 Long Term Incentive Plan.~(15)
10.6 - Employment Agreement, dated as of April 2, 1996, between NGC
Corporation and Stephen A. Furbacher.~(3)
10.7 - Employment Agreement, dated as of February 1, 2000, between
Charles L. Watson and Dynegy Inc.~(15)
10.8 - Employment Agreement, effective February 1, 2000, between
Stephen W. Bergstrom and Dynegy Inc.~(15)
+10.9 - Employment Agreement, effective February 1, 2000, between
Robert D. Doty, Jr. and Dynegy Inc.~
10.10 - Employment Agreement, effective February 1, 2000, between
Kenneth E. Randolph and Dynegy Inc.~(15)
+10.11 - Employment Agreement, effective as of February 1, 2000,
between R. Blake Young and Dynegy Inc.~
10.12 - 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.(3)
10.13 - 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.(3)
10.14 - 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.(2)
10.15 - Scope of Business Agreement, dated as of May 22, 1996, by
and between Chevron Corporation and NGC Corporation.(3)
10.16 - 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.(2)
*10.17 - Natural Gas Purchase and Sale Agreement, dated as of
August 30, 1996, between Chevron U.S.A. Inc. and Natural Gas
Clearinghouse.(2)
*10.18 - Master Natural Gas Processing Agreement, dated as of
September 1, 1996, between Chevron U.S.A. Inc. and Warren
Petroleum Company, Limited Partnership.(2)
*10.19 - Master Natural Gas Liquids Purchase Agreement, dated as of
September 1, 1996, between Warren Petroleum Company, Limited
Partnership and Chevron U.S.A. Inc.(2)
</TABLE>
<PAGE>
DYNEGY FORM 10-K
57
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------------------------------------------------------------------------------------------
<C> <C> <S>
*10.20 - Gas Supply and Service Agreement, dated as of September 1,
1996, between Chevron Products Company and Natural Gas
Clearinghouse.(2)
10.21 - Master Power Service Agreement, dated as of May 16, 1996,
between Electric Clearinghouse, Inc. and Chevron U.S.A.
Production Company.(3)
10.22 - Master Power Service Agreement, dated as of May 16, 1996,
between Electric Clearinghouse, Inc. and Chevron Chemical
Company.(3)
10.23 - Master Power Service Agreement, dated as of May 16, 1996,
between Electric Clearinghouse, Inc. and Chevron Products
Company.(3)
*10.24 - Feedstock Sale and Refinery Product Purchase Agreements,
dated as of September 1, 1996, between Chevron Products
Company and Warren Petroleum Company, Limited
Partnership.(2)
*10.25 - Refinery Product Sale Agreement (Hawaii), dated as of
September 1, 1996, between Warren Petroleum Company, Limited
Partnership and Chevron Products Company.(2)
*10.26 - Feedstock Sale and Refinery Product Master Services
Agreement, dated as of September 1, 1996, between Chevron
Products Company and Warren Petroleum Company, Limited
Partnership.(2)
*10.27 - CCC Product Sale and Purchase Agreement, dated as of
September 1, 1996, between Warren Petroleum Company, Limited
Partnership and Chevron Chemical Company.(2)
*10.28 - CCC/WPC Services Agreement, dated as of September 1, 1996,
between Chevron Chemical Company and Warren Petroleum
Company, Limited Partnership.(2)
*10.29 - Operating Agreement, dated as of September 1, 1996, between
Warren Petroleum Company, Limited Partnership and Chevron
Pipe Line Company.(2)
10.30 - Galena Park Services Agreement, dated as of September 1,
1996, between Chevron Products Company and Midstream
Combination Corp.(2)
10.31 - Shareholder Agreement of Energy Convergence Holding Company
with Chevron U.S.A. Inc.(9)
10.32 - First Amended and Restated Limited Partnership Agreement of
the West Texas LPG Pipeline Limited Partnership.(11)
10.33 - Amended and Restated Operating Agreement of the West Texas
LPG Pipeline Limited Partnership and Chevron Pipeline
Company.(11)
10.34 - Dynegy Inc. Severance Pay Plan.~(10)
10.35 - Registration Rights Agreement (Chevron U.S.A. Inc).(9)
10.36 - Dynegy Midstream Services, Limited Partnership Supplemental
Severance Pay Plan.~(11)
10.37 - NGC Profit Sharing/401(k) Savings Plan.~(10)
10.38 - First Amendment to NGC Profit Sharing/401(k) Savings
Plan.~(10)
10.39 - Second Amendment to NGC Profit Sharing/401(k) Savings
Plan.~(10)
10.40 - Third Amendment to Dynegy Inc. Profit Sharing/401(k) Savings
Plan.~(11)
10.41 - Fourth Amendment to Dynegy Inc. Profit Sharing/401(k)
Savings Plan.~(15)
10.42 - Fifth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings
Plan.~(15)
10.43 - Sixth Amendment to Dynegy Inc. Profit Sharing/401(k) Savings
Plan.~(15)
</TABLE>
<PAGE>
DYNEGY FORM 10-K
58
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------------------------------------------------------------------------------------------
<C> <C> <S>
10.44 - Seventh Amendment to Dynegy Inc. Profit Sharing/401(k)
Savings Plan.~(15)
10.45 - Employment Agreement, effective February 1, 2000, between
Mathew K. Schatzman and Dynegy Inc.~(16)
10.46 - Dynegy Inc. Deferred Compensation Plan for Certain
Directors.~(16)
10.47 - Illinova Corporation 1992 Long-Term Incentive Compensation
Plan.(34)
10.48 - Form of Employee Retention Agreement between Illinova
Corporation and its elected officers, Illinois Power
Company's elected officers, and the Presidents of Illinova
Corporation's subsidiaries.(33)
10.49 - Illinois Power Company Incentive Savings Trust and Illinois
Power Company Incentive Savings Plan and Amendment I
thereto.(35)
10.50 - Illinois Power Company Incentive Savings Plan, as amended
and restated effective January 1, 1991.(36)
10.51 - Illinois Power Company Retirement Income Plan for salaried
employees as amended and restated effective January 1, 1989,
as further amended through January 1, 1994.(28)
10.52 - Illinois Power Company Retirement Income Plan for employees
covered under a collective bargaining agreement as amended
and restated effective January 1, 1994.(28)
10.53 - Illinois Power Company Incentive Savings Plan as amended and
restated effective January 1, 1991, as further amended
through amendments adopted December 28, 1994.(28)
10.54 - Illinois Power Company Incentive Savings Plan for employees
covered under a collective bargaining agreement as amended
and restated effective January 1, 1991, as further amended
through amendments adopted December 28, 1994.(28)
10.55 - Clinton Nuclear Power Station Asset Purchase Agreement by
and between Illinois Power Company, as Seller, and AmerGen
Energy Company, L.L.C., as Buyer, dated as of June 30,
1999.(32)
+21.1 - Subsidiaries of the Registrant.
+23.1 - Consent of Arthur Andersen LLP.
</TABLE>
- --------------------------
+ Filed herewith
* Exhibit omits certain information which the Company has filed separately
with the Securities and Exchange 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 on
Form S-3 of NGC Corporation, Registration No. 33-97368.
(2) 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.
(3) Incorporated by reference to exhibits to the Registration Statement on
Form S-4 of Midstream Combination Corp., Registration No. 333-09419.
(4) 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.
(5) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended June 30, 1997, of NGC Corporation,
Commission File No. 1-11156.
<PAGE>
DYNEGY FORM 10-K
59
(6) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended September 30, 1997, of NGC Corporation,
Commission File No. 1-11156.
(7) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period Ended June 30, 1998, of Dynegy Inc., 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, 1997, of NGC Corporation, Commission
File No. 1-11156.
(9) Incorporated by reference to exhibits to the Current Report on Form 8-K of
Dynegy Inc., Commission File No. 1-11156, dated June 14, 1999.
(10) Incorporated by reference to exhibits to the Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1998, of Dynegy Inc., Commission
File No. 1-11156.
(11) Incorporated by reference to exhibits to the Quarterly Report on
Form 10-Q for the Quarterly Period Ended June 30, 1999, of Dynegy Inc.,
Commission File No. 1-11156.
(12) 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.
(13) Incorporated by reference to exhibits to the Registration Statement on
Form 8-A of Dynegy Inc., Commission File No. 1-15659, filed with the
Securities and Exchange Commission on February 2, 2000.
(14) Incorporated by reference to exhibits to the Current Report on Form 8-K of
Dynegy Inc., Commission File No. 1-15659, dated January 12, 2001.
(15) Incorporated by reference to exhibits to the Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1999, of Dynegy Inc., Commission
File No. 1-11156.
(16) Incorporated by reference to exhibits to the Quarterly Report on
Form 10-Q for the Quarterly Period Ended March 31, 2000, of Dynegy Inc.,
Commission File No. 1-15659.
(17) Incorporated by reference to exhibits to the Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1996, of Illinova Corporation,
Commission File No. 1-11327.
(18) Incorporated by reference to exhibits to the Current Report on Form 8-K of
Illinova Corporation, Commission File No. 1-11327, dated January 21, 1998.
(19) Filed as Exhibit 2(b) Registration No. 2-14066.
(20) Incorporated by reference to exhibits to the Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1991, of Illinova Corporation,
Commission File No. 1-3004.
(21) Incorporated by reference to exhibits to the Quarterly Report on
Form 10-Q for the Fiscal Quarter Ended June 30, 1992, of Illinova
Corporation, Commission File No. 1-3004.
(22) Incorporated by reference to exhibits to the Quarterly Report on
Form 10-Q for the Fiscal Quarter Ended September 30, 1992, of Illinova
Corporation, Commission File No. 1-3004.
(23) Incorporated by reference to exhibits to the Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1992, of Illinova Corporation,
Commission File No. 1-3004.
(24) Incorporated by reference to exhibits to the Quarterly Report on
Form 10-Q for the Fiscal Quarter Ended June 30, 1993, of Illinova
Corporation, Commission File No. 1-3004.
(25) Incorporated by reference to exhibits to the Quarterly Report on
Form 10-Q for the Fiscal Quarter Ended September 30, 1993, of Illinova
Corporation, Commission File No. 1-3004.
(26) Incorporated by reference to exhibits to the Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1993, of Illinova Corporation,
Commission File No. 1-3004.
(27) Incorporated by reference to exhibits to the Quarterly Report on
Form 10-Q for the Fiscal Quarter Ended September 30, 1994, of Illinova
Corporation, Commission File No. 1-3004.
(28) Incorporated by reference to exhibits to the Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1994, of Illinova Corporation,
Commission File No. 1-3004.
(29) Incorporated by reference to exhibits to the Quarterly Report on
Form 10-Q for the Fiscal Quarter Ended March 31, 1997, of Illinova
Corporation, Commission File No. 1-3004.
(30) Incorporated by reference to exhibits to the Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1997, of Illinova Corporation,
Commission File No. 1-3004.
(31) Incorporated by reference to exhibits to the Registration Statement on
Form S-3, filed January 22, 1999, of Illinova Corporation, Commission File
No. 333-71061.
(32) Incorporated by reference to exhibits to the Quarterly Report on
Form 10-Q for the Fiscal Quarter Ended June 30, 1999, of Illinova
Corporation, Commission File No. 1-3004.
<PAGE>
DYNEGY FORM 10-K
60
(33) Incorporated by reference to exhibits to the Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1989, of Illinova Corporation,
Commission File No. 1-3004.
(34) Incorporated by reference to exhibits to the Quarterly Report on
Form 10-Q for the Fiscal Quarter Ended March 31, 1992, of Illinova
Corporation, Commission File No. 1-3004.
(35) Incorporated by reference to exhibits to the Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1984, of Illinova Corporation,
Commission File No. 1-3004.
(36) Incorporated by reference to exhibits to the Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1990, of Illinova Corporation,
Commission File No. 1-3004.
(b) Reports on Form 8-K of Dynegy Inc.
1. During the quarter ended December 31, 2000, the Company filed a Current
Report on Form 8-K dated October 2, 2000. Items 5 and 7 were reported and
no financial statements were filed.
2. During the quarter ended December 31, 2000, the Company filed a Current
Report on Form 8-K dated October 6, 2000. Items 5 and 7 were reported and
no financial statements were filed.
<PAGE>
DYNEGY FORM 10-K
61
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.
<TABLE>
<S> <C> <C>
Dynegy Inc.
Date: March 6, 2001 By: /s/ C. L. WATSON
--------------------------------------
C. L. Watson, Chairman of the Board,
Chief Executive Officer and Director
</TABLE>
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.
<TABLE>
<S> <C> <C>
Date: March 6, 2001 By: /s/ C. L. WATSON
--------------------------------------
C. L. Watson, Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 6, 2001 By: /s/ ROBERT D. DOTY
--------------------------------------
Robert D. Doty, Senior Vice President,
Chief Financial Officer (Principal
Financial Officer)
Date: March 6, 2001 By: /s/ BRADLEY P. FARNSWORTH
--------------------------------------
Bradley P. Farnsworth, Senior Vice
President and Controller (Principal
Accounting Officer)
Date: March 6, 2001 By: /s/ STEPHEN W. BERGSTROM
--------------------------------------
Stephen W. Bergstrom, President and
Chief Operating Officer of Dynegy Inc.
and Director
</TABLE>
<PAGE>
DYNEGY FORM 10-K
62
<TABLE>
<S> <C> <C>
Date: March 6, 2001 By: /s/ CHARLES E. BAYLESS
--------------------------------------
Charles E. Bayless, Director
Date: March 6, 2001 By: /s/ PATRICIA M. ECKERT
--------------------------------------
Patricia M. Eckert, Director
Date: March 6, 2001 By: /s/ C. STEVEN MCMILLAN
--------------------------------------
C. Steven McMillan, Director
Date: March 6, 2001 By: /s/ ROBERT M. POWERS
--------------------------------------
Robert M. Powers, Director
Date: March 6, 2001 By: /s/ SHELI Z. ROSENBERG
--------------------------------------
Sheli Z. Rosenberg, Director
Date: March 6, 2001 By: /s/ JOE J. STEWART
--------------------------------------
Joe J. Stewart, Director
Date: March 6, 2001 By: /s/ DARALD W. CALLAHAN
--------------------------------------
Darald W. Callahan, Director
Date: March 6, 2001 By: /s/ GEORGE L. KIRKLAND
--------------------------------------
George L. Kirkland, Director
Date: March 6, 2001 By: /s/ R.H. MATZKE
--------------------------------------
R.H. Matzke, Director
Date: March 6, 2001 By: /s/ JERRY JOHNSON
--------------------------------------
Jerry Johnson, Director
Date: March 6, 2001 By: /s/ DANIEL L. DIENSTBIER
--------------------------------------
Daniel L. Dienstbier, Director
Date: March 6, 2001 By: /s/ J. OTIS WINTERS
--------------------------------------
J. Otis Winters, Director
</TABLE>
<PAGE>
DYNEGY FORM 10-K
F-1
DYNEGY INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
- ----------------------------------------------------------------------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 2000 and
1999 F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
FINANCIAL STATEMENT SCHEDULE
Condensed Financial Statements of the Registrant F-52
</TABLE>
<PAGE>
DYNEGY FORM 10-K
F-2
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, 2000 and 1999, 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,
2000. 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, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000, 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
March 6, 2001
<PAGE>
DYNEGY FORM 10-K
F-3
<TABLE>
<CAPTION>
DYNEGY INC.
CONSOLIDATED BALANCE SHEETS DECEMBER 31, December 31,
(IN MILLIONS, EXCEPT SHARE DATA) 2000 1999
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 86 $ 45
Accounts receivable, net 5,036 1,992
Accounts receivable, affiliates 49 49
Inventories 329 272
Assets from risk-management activities 4,410 380
Prepayments and other assets 240 67
- -------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 10,150 2,805
- -------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT 7,356 2,575
Less: accumulated depreciation (649) (557)
- -------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 6,707 2,018
- -------------------------------------------------------------------------------------------
OTHER ASSETS
Investments in unconsolidated affiliates 799 627
Assets from risk-management activities 1,527 453
Intangible assets, net of amortization 1,502 365
Other assets 721 257
- -------------------------------------------------------------------------------------------
TOTAL ASSETS $21,406 $6,525
- -------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,777 $1,667
Accounts payable, affiliates 46 162
Accrued liabilities and other 628 184
Liabilities from risk-management activities 3,838 334
Notes payable and current portion of long-term debt 116 191
- -------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 9,405 2,538
- -------------------------------------------------------------------------------------------
LONG-TERM DEBT 2,828 1,299
OTHER LIABILITIES
Transitional funding trust notes 605 -
Liabilities from risk-management activities 1,568 321
Deferred income taxes 1,426 335
Other long-term liabilities 612 420
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES 16,444 4,913
- -------------------------------------------------------------------------------------------
MINORITY INTEREST (NOTE 10) 1,018 103
SERIAL PREFERRED SECURITIES OF A SUBSIDIARY (NOTE 9) 46 -
COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST
(NOTE 9) 300 200
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 50,000,000 shares
authorized at December 31, 1999: 8,000,000 shares
designated as Series A Participating Preferred Stock,
5,392,600 shares issued - 75
Common stock, $.01 par value, 400,000,000 shares authorized
at December 31, 1999: 217,348,621 shares issued - 1
Class A Common Stock, no par value, 300,000,000 shares
authorized;
237,390,802 shares issued and outstanding at
December 31, 2000 2,190 -
Class B Common Stock, no par value, 120,000,000 shares
authorized;
85,330,544 shares issued and outstanding at December 31,
2000 760 -
Additional paid-in capital - 973
Accumulated other comprehensive income (loss), net of tax (15) -
Retained earnings 666 277
Less: treasury stock, at cost: 70,000 and 1,656,966 shares
at December 31, 2000 and 1999, respectively (3) (17)
- -------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,598 1,309
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $21,406 $6,525
- -------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
DYNEGY FORM 10-K
F-4
<TABLE>
<CAPTION>
DYNEGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2000 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $29,445 $15,430 $14,258
Cost of sales 27,986 14,886 13,829
- ---------------------------------------------------------------------------------------------
Operating margin 1,459 544 429
Depreciation and amortization 389 129 113
Impairment, abandonment and other charges - - 10
General and administrative expenses 329 201 186
- ---------------------------------------------------------------------------------------------
Operating income 741 214 120
Equity in earnings of unconsolidated affiliates 205 80 91
Other income 235 73 47
Interest expense (251) (78) (75)
Other expenses (139) (45) (8)
Minority interest in income of subsidiaries (29) (17) (17)
- ---------------------------------------------------------------------------------------------
Income before income taxes 762 227 158
Income tax provision 261 75 50
- ---------------------------------------------------------------------------------------------
NET INCOME $ 501 $ 152 $ 108
- ---------------------------------------------------------------------------------------------
NET INCOME PER SHARE:
Net income $ 501 $ 152 $ 108
Less: preferred stock dividends 35 - -
- ---------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 466 $ 152 $ 108
- ---------------------------------------------------------------------------------------------
Basic earnings per share $ 1.54 $ 0.71 $ 0.52
- ---------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.48 $ 0.66 $ 0.48
- ---------------------------------------------------------------------------------------------
Basic shares outstanding 302 213 209
- ---------------------------------------------------------------------------------------------
Diluted shares outstanding 315 230 227
- ---------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
DYNEGY FORM 10-K
F-5
<TABLE>
<CAPTION>
DYNEGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31,
(IN MILLIONS) 2000 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 501 $ 152 $ 108
Items not affecting cash flows from operating activities:
Depreciation, amortization, impairment and abandonment 357 108 103
Equity in earnings of affiliates, net of cash
distributions (87) (14) (6)
Risk-management activities (354) (115) (7)
Deferred income taxes 131 63 52
Gain on sale of assets, net (132) (50) (36)
Income tax benefit from stock option exercise and other 116 16 11
Change in assets and liabilities resulting from operating
activities:
Accounts receivable (5,117) (463) 51
Inventories 21 (106) (17)
Prepayments and other assets 95 54 (31)
Accounts payable 4,946 348 44
Accrued liabilities (15) 37 (28)
Other, net (24) (21) 7
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 438 9 251
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (769) (365) (298)
Investment in unconsolidated affiliates (141) (84) (78)
Business acquisitions, net of cash acquired (1,202) - (3)
Proceeds from asset sales 856 81 45
Other, net (48) 49 39
- --------------------------------------------------------------------------------------------
Net cash used in investing activities (1,304) (319) (295)
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 319 397 212
Repayments of long-term borrowings (359) (44) (493)
Net cash flow from commercial paper and money market lines
of credit (906) (42) 350
Proceeds from sale of capital stock, options and warrants 1,216 22 4
Treasury stock acquisitions (3) - (7)
Redemption of Illinois Power Monthly Income Preferred
Securities (93) - -
Dividends and other distributions, net (112) (8) (8)
Contributions of minority interest partners, net and other 845 2 (9)
- --------------------------------------------------------------------------------------------
Net cash provided by financing activities 907 327 49
- --------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 41 17 5
Cash and cash equivalents, beginning of year 45 28 23
- --------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 86 $ 45 $ 28
- --------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
DYNEGY FORM 10-K
F-6
DYNEGY INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury
------------------- ------------------- Paid In Retained -------------------
(in millions) Shares Amount Shares Amount Capital Other Earnings Shares Amount
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997 5 $ 75 209 $ 1 $ 920 - $ 33 (1) $(10)
Comprehensive income:
Net income - - - - - - 108 - -
Total comprehensive income
Options exercised - - 1 - 4 - - - -
Dividends and other
distributions - - - - - - (8) - -
401(k) plan and profit
sharing stock - - 1 - 7 - - - -
Options granted - - - - 4 - - - -
Treasury stock - - - - - - - (1) (7)
Other - - - - - - - - -
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 5 75 211 1 935 - 133 (2) (17)
Comprehensive income:
Net income - - - - - - 152 - -
Total comprehensive income
Options exercised - - 5 - 22 - - - -
Dividends and other
distributions - - - - - - (8) - -
401(k) plan and profit
sharing stock - - 1 - 10 - - - -
Options granted - - - - 6 - - - -
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 5 75 217 1 973 - 277 (2) (17)
COMPREHENSIVE INCOME
NET INCOME - - - - - - 501 - -
OTHER COMPREHENSIVE
INCOME, NET OF TAX - - - - - (15) - - -
TOTAL COMPREHENSIVE INCOME
ILLINOVA ACQUISITION 1 (75) 59 1,817 (973) - - 2 17
COMMON STOCK ISSUED - - 23 858 - - - - -
PREFERRED STOCK CONVERSION (6) - 12 - - - - - -
EXTANT ACQUISITION - - 2 90 - - - - -
OPTIONS EXERCISED - - 9 157 - - - - -
DIVIDENDS AND OTHER
DISTRIBUTIONS - - - - - - (112) - -
401(K) PLAN AND PROFIT
SHARING STOCK - - 1 12 - - - - -
OPTIONS GRANTED - - - 15 - - - - -
TREASURY STOCK - - - - - - - - (3)
- -------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000 - $ - 323 $2,950 $ - $(15) $ 666 - $ (3)
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(in millions) Total
- ----------------------------- --------
<S> <C>
December 31, 1997 $1,019
Comprehensive income:
Net income 108
------
Total comprehensive income 108
Options exercised 4
Dividends and other
distributions (8)
401(k) plan and profit
sharing stock 7
Options granted 4
Treasury stock (7)
Other -
- -----------------------------
December 31, 1998 $1,127
Comprehensive income:
Net income 152
------
Total comprehensive income 152
Options exercised 22
Dividends and other
distributions (8)
401(k) plan and profit
sharing stock 10
Options granted 6
- -----------------------------
December 31, 1999 1,309
COMPREHENSIVE INCOME
NET INCOME 501
OTHER COMPREHENSIVE
INCOME, NET OF TAX (15)
------
TOTAL COMPREHENSIVE INCOME 486
ILLINOVA ACQUISITION 786
COMMON STOCK ISSUED 858
PREFERRED STOCK CONVERSION -
EXTANT ACQUISITION 90
OPTIONS EXERCISED 157
DIVIDENDS AND OTHER
DISTRIBUTIONS (112)
401(K) PLAN AND PROFIT
SHARING STOCK 12
OPTIONS GRANTED 15
TREASURY STOCK (3)
- -----------------------------
DECEMBER 31, 2000 $3,598
- -----------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
NOTE 1 - ORGANIZATION AND OPERATIONS OF THE COMPANY
Dynegy Inc. ("Dynegy" or the "Company") is a leading provider of energy and
communications solutions to customers in North America, the United Kingdom and
Continental Europe. The Company's leadership position extends across the entire
convergence value chain, from broadband, power generation and wholesale and
direct commercial and industrial marketing and trading of power, natural gas,
coal, emission allowances, and weather derivatives to transportation, gathering
and processing of natural gas liquids. The Company is also involved in the
transmission and distribution of electricity and gas and provides residential
service to electric and gas consumers.
NOTE 2 - ACCOUNTING POLICIES
The accounting policies of Dynegy conform to generally accepted accounting
principles in the United States. 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 materially 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. 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.
INVESTMENT IN UNCONSOLIDATED AFFILIATES. 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. Any excess of the Company's
investment in these entities over its equity in the underlying net assets of the
affiliates is amortized over the estimated economic service lives of the
underlying assets. Other investments less than 20 percent owned are generally
considered available-for-sale and are recorded at quoted market value, if
readily marketable, or at the lower of cost or net realizable value, if
non-marketable. The change in the unrealized gain or loss, net of
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-8
deferred income tax, is recorded as a separate component of other comprehensive
income in the consolidated statement of stockholders' equity. Realized gains and
losses on investment transactions are determined on the specific-identification
basis.
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, weather or
other conditions. Receivables generally are 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 consisted primarily of natural gas in storage of $99
million and $165 million, natural gas liquids of $135 million and $66 million
and coal inventory of $24 million and none at December 31, 2000 and 1999 and
crude oil of $11 million at December 31, 1999. Such inventory is valued at the
lower of weighted average cost or market. Materials and supplies inventory of
$44 million and $30 million at December 31, 2000 and 1999, respectively, is
carried at the lower of cost or market using the specific-identification method.
The Company also had emission credit certificates of $27 million as of
December 31, 2000, which are carried at the lower of cost or market.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment consisting
principally of gas gathering, processing, fractionation, terminaling and storage
facilities, natural gas transmission lines, pipelines, power generating
facilities and communications equipment is recorded at cost. Expenditures for
major replacements, renewals and major maintenance are capitalized. The Company
considers major maintenance to be expenditures incurred on a cyclical basis in
order to maintain and prolong the efficient operation of its plants.
Expenditures for 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
40 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
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-9
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 and for Long-Lived
Assets to be Disposed of."
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. When a range of probable loss exists, the Company accrues the lesser
end of the range.
GOODWILL AND OTHER INTANGIBLE ASSETS. Intangible assets, principally goodwill,
are generally amortized on a straight-line basis over the estimated useful lives
of 25 to 40 years. Accumulated amortization of intangible assets was $98 million
and $61 million at December 31, 2000 and 1999, respectively. The related
amortization expense was $37 million and $9 million for the year ended
December 31, 2000 and 1999, 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
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-10
upon output, product delivery or satisfaction of specific targets, all as
specified by contractual terms. Fees from certain contracts 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. Shipping and handling costs are included in
revenue when billed to customers in conjunction with the sale of products.
The Company's transmission and distribution revenues are recognized when
services are provided to customers. Unbilled revenues represent the estimated
amount customers will be billed for service delivered from the time meters were
last read to the end of the accounting period.
Revenues derived from communications activities are recognized from monthly
recurring service in the month the service is provided. Amounts billed in
advance of providing services are recorded as unearned revenue until the period
such services are provided. Revenue related to installation of service and sale
of customer equipment is recognized when equipment is delivered and installation
is completed.
Substantially all of the operations of the Company's world-wide natural gas
marketing, power marketing, bandwidth marketing and portions of natural gas
liquids 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 estimated 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 all remaining liquids 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, electricity and coal businesses in order to minimize the risk of
market fluctuations. Dynegy also monitors its exposure to fluctuations in
interest rates and foreign currency exchange rates and may execute swaps,
forward-exchange contracts or other financial instruments to manage these
exposures. Financial instruments that are utilized in the Company's trading
operations are considered to be trading and are accounted for accordingly. Gains
and losses from hedging transactions are recognized in income in the periods for
which the underlying commodity, interest rate or foreign currency transaction
was
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-11
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 future changes in the value of that
financial instrument in income. 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 is no longer deferred
and is recognized in the period the underlying contract 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 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 options outstanding and a warrant. Common shares outstanding and
the resulting computation of basic and diluted earnings per share for all
periods prior to December 31, 1999 have been restated to give effect to the 0.69
fixed exchange ratio contained in the terms of the Illinova acquisition. Also,
all common shares outstanding, price per share, dividends per share and earnings
per share amounts relating to transactions or periods prior to August 22, 2000
have been restated for the two-for-one stock split effected by means of a stock
dividend distributed on August 22, 2000.
FOREIGN CURRENCY TRANSLATIONS. For subsidiaries whose functional currency is
not the 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. Translation adjustments for the asset and liability
accounts are included as a separate component of other comprehensive income in
stockholders' equity. Currency transaction gains and losses are recorded in
income.
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-12
EMPLOYEE STOCK OPTIONS. The Company applies the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25") and related interpretations in accounting for its stock
compensation plans. Accordingly, compensation expense is not recognized for
stock options unless the options were granted at an exercise price lower than
the market value on the grant date. The Company has granted below-market options
in the past and continues to recognize compensation expense over the applicable
vesting periods. Stock options are not expected to be issued at less than market
price in the foreseeable future.
REGULATORY ASSETS. Financial Accounting Standard No. 71, "Accounting for the
Effects of Certain Types of Regulation" ("Statement No. 71") allows companies
whose service obligations and prices are regulated to maintain balance sheet
assets representing costs they expect to recover through inclusion in future
rates. Illinois Power Company ("IP"), the Company's wholly owned subsidiary, has
regulatory assets recorded in accordance with Statement No. 71. Regulatory
assets represent probable future revenues associated with certain costs that are
expected to be recovered from customers through the ratemaking process. The
significant components of regulatory assets at December 31, 2000 were
approximately $385 million and are included in other long-term assets.
NOTE 3 - RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
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, 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.
Dynegy generally attempts to balance its fixed-price physical and financial
purchase and sales commitments in terms of contract volumes, and the timing of
performance and delivery obligations. However, the Company may, at times, have a
bias in the market within guidelines established by management and Dynegy's
Board of Directors, resulting from the management of its portfolio. In addition,
as a result of marketplace illiquidity and other factors, the Company may, at
times, be unable to hedge
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-13
its portfolio fully for certain market risks. Management continually monitors
the Company's 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 financial performance and cash flow derived from certain generating capacity
(e.g., merchant peaking facilities) is impacted annually, either favorably or
unfavorably, by changes in and the relationship between the cost of the
commodity fueling the facilities and electricity prices, which in turn
influences the volume of electricity generated by these assets.
Operating results associated with natural gas gathering, processing and
fractionation activities are sensitive to changes in natural gas liquids prices
and the availability of inlet volumes. In addition, similar to peaking
electricity generating facilities, straddle processing plants are impacted by
changes in, and the relationship between, natural gas and natural gas liquids
prices, which in turn influence the volumes of gas processed at these
facilities. The impact from changes in natural gas liquids prices on upstream
operations results principally from the nature of contractual terms under which
natural gas is processed and products are sold. The availability of inlet
volumes directly affects the utilization and profitability of this segment's
businesses. Commodity price volatility may also affect operating margins derived
from the Company's natural gas liquids marketing operations.
Operating results in the transmission and distribution business may be impacted
by commodity price fluctuations resulting from purchases of electricity used in
supplying service to its customers. IP has contracted for volumes from various
suppliers under contracts having various terms. Certain of these contracts do
not obligate the supplier to provide replacement power to IP in the event of a
curtailment or shutdown of operating facilities. If the commodity volumes
supplied from these agreements are inadequate to cover IP's native load, the
Company will be required to purchase its supply needs in open-market purchases
at prevailing market prices. Such purchases would expose IP to commodity price
risk. Price risk associated with the gas marketing operations of IP is mitigated
through contractual terms applicable to the business, as allowed by the Illinois
Commerce Commission (ICC).
Dynegy's commercial groups manage, on a portfolio basis, the resulting market
risks inherent in commercial transactions, subject to parameters established by
the
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-14
Dynegy Board of Directors. Market risks are monitored by a risk control group
that operates independently from the commercial units to ensure compliance with
Dynegy's risk-management policies. Risk measurement is also practiced daily
against the Dynegy portfolios with Value at Risk, stress testing and scenario
analysis on the commercial profiles.
ACCOUNTING FOR RISK-MANAGEMENT ACTIVITIES. Substantially all of the operations
of the Company's world-wide gas marketing, power marketing, bandwidth marketing
and certain liquids 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 reliable or any market
quotations for such contracts are available. The lack of reliable long-term
pricing requires the use of mathematical models to value these commitments.
These mathematical models utilize historical market data and other factors to
forecast future prices, 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, as with pricing curves derived from
quoted market prices, 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 and pertinent industry data in order
to forecast certain pricing curves. However, there can be no assurance that
actual cash returns will not vary materially from those estimated through
application of such models.
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-15
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES. Dynegy measures
entity-wide market risk in its financial trading and risk-management portfolios
using Value at Risk. Value at Risk provides a consistent measure of risk across
diverse energy markets and products with different risk factors to determine the
overall corporate risk tolerance, risk targets and position limits. The use of
this methodology requires a number of key assumptions including the selection of
a confidence level and the holding period to liquidation. Dynegy relies on Value
at Risk to determine the maximum potential reduction in the trading portfolio
value allowed within a given probability over a defined period. Because of
limitations to Value at Risk, Dynegy uses other means, such as market
volatility, liquidity, event and correlation risk, to monitor market risk in its
trading portfolios. In addition, Dynegy performs regular stress and scenario
analyses to measure extreme losses due to extraordinary events. Value at Risk
and stress testing results are reviewed to determine the maximum allowable
reduction in the total equity of the commodity portfolios.
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 financial
trading and risk-management 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 value of Dynegy's financial and commodity risk-
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-16
management transactions at December 31, 2000:
<TABLE>
<CAPTION>
Investment Below Investment
Grade Credit Grade Credit
($ in millions) Quality Quality Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Utilities and power generators $150 $(29) $ 121
Financial institutions 369 0 369
Oil and gas producers 234 79 313
Industrial companies (52) (69) (121)
Other (58) (21) (79)
- ---------------------------------------------------------------------------------------------------
Value of fixed-price transactions before reserves $643 $(40) 603
Credit and market reserves (146)
-----
457
Other creditworthy risk management assets, net 74
-----
Net risk-management assets 531
-----
</TABLE>
At December 31, 2000, the term of Dynegy's financial trading and risk-management
portfolio extends to 2016, and the average remaining life of an individual
transaction was three months.
COMPREHENSIVE CHANGE IN ACCOUNTING PRINCIPLES. The Company must adopt Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("Statement No. 133") effective January 1, 2001. Provisions in
Statement No. 133 will affect the accounting and disclosure of certain
contractual arrangements and operations of the Company beginning in the first
quarter of 2001. The Company will record the impact of the adoption as a
cumulative effect adjustment in the Company's consolidated results in the
quarter ended March 31, 2001. The amount is immaterial to first quarter 2001 net
income and the Company's financial position.
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.
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-17
The carrying values of current financial assets and liabilities approximate fair
values due to the short-term maturities of these instruments. The carrying
amounts and fair values of the Company's other financial instruments were:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
2000 1999
CARRYING FAIR CARRYING FAIR
($ IN MILLIONS) AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DYNEGY HOLDINGS INC.
Commercial Paper $ 115 $ 115 $456 $ 456
Money Market Lines of Credit - - 40 40
Canadian Credit Agreement 59 59 40 40
Senior Notes, 6.75% through 8.125%, due 2002 through
2026 1,200 1,200 900 858
Non-Recourse Debt - - 89 89
Preferred Securities of a Subsidiary Trust 200 189 200 191
Interest Rate Risk-Management Contracts - - - (3)
Foreign Currency Risk-Management Contracts 2 2 3 3
Commodity Risk-Management Contracts 970 958 97 94
ILLINOVA CORPORATION
Senior Notes, 7.125%, due 2004 103 101 - -
Medium Term Notes, 6.15% through 6.46%, due 2001
through 2002 50 50 - -
Serial Preferred Securities of a Subsidiary 46 27 - -
ILLINOIS POWER COMPANY
Commercial Paper 148 148 - -
New Mortgage Bonds, 5.625% through 7.5%, due 2002
through 2025 674 671 - -
New Mortgage Bonds, 4.5% through 7.4%, due 2024
through 2028 (Pollution control series A, B,
U, & V) 175 173 - -
New Mortgage Bonds, Adjustable rate, Series due
2028 through 2032 (Pollution control series M, N,
O, P, Q & R) 261 262 - -
Trust Originated Preferred Securities 100 99 - -
Variable Rate Long-Term Debt, due 2017 75 75 - -
Transitional Funding Trust Notes, 5.26% through
5.65%, due 2001 through 2008 689 677 - -
DYNEGY GLOBAL COMMUNICATIONS
Investment in warrants 14 14 - -
</TABLE>
The financial statement carrying amounts of the Company's credit agreement,
variable-rate debt and power generation notes were assumed to approximate fair
value. The fair values of the Company's other long-term indebtedness, including
the Preferred Securities of a Subsidiary Trust, were based on quoted market
prices by financial institutions that actively trade these debt securities. The
fair value of interest rate,
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-18
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 commodity swap and option agreements extend up
to 15 years, and the futures contracts extend up to 10 years. The absolute
notional contract amounts associated with the commodity risk-management,
interest rate and forward exchange contracts, respectively, were as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas (Trillion Cubic Feet) 7.709 5.702 4.179
Electricity (Million Megawatt Hours) 162.321 42.949 1.835
Natural Gas Liquids (Million Barrels) 9.899 19.902 6.397
Weather Derivatives (in thousand Heating Degree Days) 427.423 - -
Crude Oil (Million Barrels) - 35.554 18.800
Interest Rate Swaps (in millions of U.S. Dollars) $ - $ 37 $ 69
Fixed Interest Rate Paid on Swaps (Percent) - 8.210 8.067
U.K. Pound Sterling (in millions of U.S. Dollars) $ 15 $ 86 $ 69
Average U.K. Pound Sterling Contract Rate (in U.S. Dollars) $ 1.4658 $1.6191 $1.6143
Euro dollars (in millions of U.S. Dollars) $ 36 $ - $ -
Average Euro dollar Contract Rate (in U.S. Dollars) $ 1.0200 $ - $ -
Canadian Dollar (in millions of U.S. Dollars) $ 738 $ 289 $ 268
Average Canadian Dollar Contract Rate (in U.S. Dollars) $ 0.6768 $0.6775 $0.6710
</TABLE>
Cash-flow requirements for these commodity risk-management, interest rate and
foreign exchange contracts were estimated based upon market prices in effect at
December 31, 2000. Cash-flow requirements were as follows:
<TABLE>
<CAPTION>
($ in millions) 2001 2002 2003 2004 2005 Beyond
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Future estimated net inflows based on year end
market prices/rates $530 $136 $73 $71 $49 $100
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-19
NOTE 4 - CASH FLOW INFORMATION
Detail of supplemental disclosures of cash flow and non-cash investing and
financing information was:
<TABLE>
<CAPTION>
Year Ended December 31,
($ IN MILLIONS) 2000 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid (net of amount capitalized) $ 238 $80 $ 83
- --------------------------------------------------------------------------------------------
Taxes paid (net of refunds) $ 40 $ 2 $ (8)
- --------------------------------------------------------------------------------------------
Detail of businesses acquired:
Current assets and other $ 598 $ - $ 5
Fair value of non-current assets 7,343 - 102
Liabilities assumed, including deferred taxes (4,782) - (104)
Capital stock issued and options exercised (1,907) - -
Cash balance acquired (50) - -
- --------------------------------------------------------------------------------------------
Cash paid, net of cash acquired $ 1,202 $ - $ 3
- --------------------------------------------------------------------------------------------
</TABLE>
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Investments in property, plant and equipment consisted of:
<TABLE>
<CAPTION>
December 31,
($ IN MILLIONS) 2000 1999
- ---------------------------------------------------------------------------------
<S> <C> <C>
Dynegy Marketing and Trade $3,505 $ 638
Dynegy Midstream Services:
Natural gas processing 934 1,211
Fractionation 198 177
Liquids marketing 268 141
Natural gas gathering and transmission 193 354
Crude oil 9 54
Transmission and Distribution 1,906 -
Dynegy Global Communications 58 -
Other 285 -
- ---------------------------------------------------------------------------------
7,356 2,575
Less: accumulated depreciation (649) (557)
- ---------------------------------------------------------------------------------
$6,707 $2,018
- ---------------------------------------------------------------------------------
</TABLE>
Interest capitalized related to costs of projects in process of development
totaled $30.1 million, $16.7 million and $7.6 million for the years ended
December 31, 2000, 1999 and 1998, respectively. In 2000, a $25 million
impairment reserve was recorded related to Canadian gas processing assets.
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-20
NOTE 6 - INVESTMENT IN UNCONSOLIDATED AFFILIATES
The Company's investments in unconsolidated affiliates, accounted for under the
equity method, include:
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, 2000, 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, which
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 joint ventures, each
formed to build, own and operate cogeneration facilities. The Company's interest
in each of these joint ventures is 50 percent. 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, 2000, the unamortized excess of the Company's investment in these joint
ventures over its equity in the underlying net assets of the affiliates
approximated $148 million.
GULF COAST FRACTIONATORS ("GCF"). GCF is a Texas limited partnership that owns
and operates a NGL fractionation facility in Mont Belvieu, Texas. Dynegy owns a
38.75 percent limited partner interest in GCF. At December 31, 2000, the
unamortized excess of the Company's investment in GCF over its equity in the
underlying net assets of the affiliate approximated $14 million.
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 NGL pipeline. Effective May 1, 1999, Dynegy's
interest in the West Texas Partnership was reduced from 49.0 percent to 39.2
percent, upon admittance of Mid-America Pipeline Company into the partnership.
At December 31, 2000, the unamortized excess of the Company's investment in the
West Texas Partnership over its equity in the
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-21
underlying net assets of the affiliate approximated $23 million.
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 has an approximate 23 percent interest in the facility, serves as
operator, and has commercial responsibility for product distribution and sales.
At December 31, 2000, the unamortized excess of the Company's investment in this
joint venture over its equity in the underlying net assets of the affiliate
approximated $9 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
interest in Waskom. Dynegy operates the facility and has commercial
responsibility for product distribution and sales.
CANADIAN MIDSTREAM SERVICES, LTD. ("CMSL"). CMSL is a partnership that owns and
operates a natural gas processing facility. Dynegy owns a 29.19 percent in CMSL.
STRUCTURED INVESTMENT PARTNERSHIPS. Dynegy acquired interests in several power
generation facilities when it acquired Illinova Corporation effective
January 1, 2000. The plants are powered by natural gas, coal or wind.
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-22
Aggregate equity method investment at December 31, 2000, 1999 and 1998, was
$727 million, $618 million and $499 million, respectively. Dividends received on
these investments during each of the three years in the period ended December
31, 2000, totaled $118 million, $66 million and $85 million, respectively.
Summarized aggregate financial information for these investments and Dynegy's
equity share thereof was:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
2000 1999 1998
EQUITY Equity Equity
($ IN MILLIONS) TOTAL SHARE TOTAL SHARE TOTAL SHARE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current assets(1) $ 662 $191 $ 318 $110 $ 324 $131
Non-current assets(1) 2,272 902 1,973 787 1,984 803
Current liabilities(1) 458 139 296 98 292 124
Non-current liabilities(1) 1,170 423 1,051 421 1,161 486
Operating margin(1) 553 172 367 135 397 159
Net income(1) 481 196 135 59 157 69
</TABLE>
- --------------------------
(1) The financial data for all periods presented are exclusive of amounts
attributable to the Company's investment in Accord Energy Limited ("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, 2000 totaled $9 million, $21 million and $22 million,
respectively. The Company sold its investment in Accord in the third quarter
of 2000.
At December 31, 2000, the Company had cost basis investments in eSpeed, Altra
Energy Technologies, Inc., Canenerco, Ltd., Compton Petroleum Corporation,
Enertech Capital Partners II L.P., Inc., Sagemaker, Inc., Energy Infrastructure
Overseas, Ltd., Media.Net Communications, Inc. and various limited partnerships.
Dynegy's aggregate investment in these entities totaled $72 million and $9
million at December 31, 2000 and 1999, respectively.
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-23
NOTE 7 - DEBT
Long-term debt outstanding consisted of the following at December 31:
<TABLE>
<CAPTION>
($ IN MILLIONS) 2000 1999
- ---------------------------------------------------------------------------------
<S> <C> <C>
Dynegy Holdings Inc.
Commercial Paper $ 115 $ 456
Money Market Lines of Credit - 40
Canadian Credit Agreement 59 40
Senior Notes, 6.75% through 8.125%, due 2002 through 2026 1,200 900
Non-Recourse Debt - 89
Illinova Corporation
Senior Notes, 7.125%, due 2004 103 -
Medium Term Notes, 6.15% through 6.46%, due 2001 through
2002 50 -
Illinois Power Company
Commercial Paper 148 -
New Mortgage Bonds, 5.625% through 7.5%, due 2002 through
2025 674 -
New Mortgage Bonds, 4.5% through 7.4%, due 2024 through
2028 (Pollution control series A, B, U, & V) 175 -
New Mortgage Bonds, Adjustable rate, Series due 2028
through 2032 (Pollution control series M, N, O, P, Q &
R) 261 -
Variable Rate Long-Term Debt, due 2017 75 -
Transitional Funding Trust Notes, 5.26% through 5.65%, Due
2001 through 2008 689 -
- ---------------------------------------------------------------------------------
$3,549 $1,525
Less: Long-Term Debt due within one year 116 191
- ---------------------------------------------------------------------------------
Total Long-Term Debt $3,433 $1,334
- ---------------------------------------------------------------------------------
</TABLE>
Aggregate maturities of the principal amounts of all long-term indebtedness are:
2001 - $116 million; 2002 - $402 million; 2003 - $276 million; 2004 - $186
million; 2005 - $607 million; and beyond - $2 billion.
COMMERCIAL PAPER, MONEY MARKET LINES OF CREDIT AND EXTENDIBLE FLOATING RATE
LOANS. The Company utilizes commercial paper proceeds and borrowings under
uncommitted money market lines of credit for general corporate purposes,
including short-term working capital requirements. The commercial paper programs
for Dynegy, Dynegy Holdings Inc. ("DHI") and IP are limited to and fully
supported by existing credit agreements. Weighted average interest rates on
amounts outstanding under the commercial paper program for DHI were 8.1% and
6.2% at December 31, 2000 and 1999, respectively. The weighted average interest
rate on amounts outstanding under IP's commercial paper program was 8.0% at
December 31, 2000. The Company classifies outstanding commercial paper and
borrowings under money market lines of credit as
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-24
long-term debt to the extent of availability under existing long-term committed
credit facilities, as management's intent is to maintain these obligations for
longer than one year, subject to an overall reduction in corporate debt levels.
CREDIT AGREEMENTS: The following table displays certain terms of the Company's
credit agreements as of December 31, 2000:
<TABLE>
<CAPTION>
REVOLVING CREDIT AGREEMENTS Amount Maturity Eurodollar Facility
($ in millions) Available Date Term Margin Fee
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dynegy Inc. $300 11/02/02 Multi-year 0.450% 0.150%
Dynegy Holdings Inc. $400 05/27/03 Multi-year 0.200% 0.100%
$400 05/02/01 364-day 0.400% 0.100%
$500 12/12/01 364-day 0.525% 0.100%
Canadian Credit Agreement $ 60 11/23/01 1-year 0.400% 0.250%
Illinois Power Company $300 05/31/01 364-day 0.625% 0.125%
</TABLE>
The Dynegy, DHI and IP credit agreements provide funding for letters of credit,
working capital, capital expenditures and general corporate purposes, including
commercial paper support. Generally, borrowings under the credit agreements bear
interest at a Eurodollar rate plus a margin that is determined based on
designated unsecured debt ratings. Financial covenants in the credit agreements
are limited to a debt-to-capitalization test. Letters of credit under the credit
agreements aggregated approximately $85 million at December 31, 2000.
The Canadian Credit Agreement supports general corporate purposes, with
obligations under the agreement fully and unconditionally guaranteed by DHI.
Generally, borrowings under the agreement bear interest at a Eurodollar rate
plus a margin that is determined based on DHI's unsecured senior debt rating or
at the participating bank's "Banker's Acceptance Rate." At December 31, 2000,
outstanding amounts under the facility totaled $59 million at a weighted average
rate of 6.68%.
After consideration of outstanding commercial paper and letters of credit, the
unused borrowing capacity under the credit agreements at December 31, 2000
approximated $300 million, $1.1 billion and $152 million for Dynegy, DHI and IP,
respectively.
LONG-TERM DEBT. The Company has a series of notes, debentures, new mortgage
bonds, pollution control bonds and transitional funding trust notes having
maturities that extend through 2032. The
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-25
transitional funding trust notes are non-recourse to the Company. Certain of
these securities are redeemable at the Company's option, in whole or in part,
from time-to-time, at formula-based redemption prices as defined in the
applicable indenture. There are no restrictive covenants associated with these
securities.
NOTE 8 - INCOME TAXES
The Company is subject to U.S. federal, foreign and state income taxes on its
operations. Components of income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
($ IN MILLIONS) 2000 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense (benefit):
Domestic $ 85 $ - $(1)
Foreign 25 12 (1)
Deferred tax expense (benefit):
Domestic 158 56 44
Foreign (7) 7 8
- ------------------------------------------------------------------------------------------------
Income tax provision: $261 $75 $50
- ------------------------------------------------------------------------------------------------
</TABLE>
Components of income before income taxes were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
($ IN MILLIONS) 2000 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes:
Domestic $726 $166 $134
Foreign 36 61 24
- --------------------------------------------------------------------------------------------
$762 $227 $158
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-26
Deferred income taxes are provided for the temporary differences between the tax
basis of Dynegy's assets and liabilities and their reported financial statement
amounts. Significant components of deferred tax liabilities and assets were as
follows:
<TABLE>
<CAPTION>
December 31,
($ IN MILLIONS) 2000 1999
- ---------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loss carryforward $ 19 149
Alternative Minimum Tax ("AMT") and other credits 218 12
- ---------------------------------------------------------------------------------
237 161
Valuation allowance - -
- ---------------------------------------------------------------------------------
237 161
Deferred tax liabilities:
Items associated with capitalized costs 1,663 496
- ---------------------------------------------------------------------------------
Net deferred tax liability $1,426 $335
- ---------------------------------------------------------------------------------
</TABLE>
Realization of the aggregate deferred tax asset is dependent on the Company's
ability to generate taxable earnings in the future. There was no valuation
allowance established at December 31, 2000 or 1999, as management believes the
aggregate deferred asset is more likely than not to be fully realized in the
future.
Income tax provisions for the years ended December 31, 2000, 1999 and 1998, were
equivalent to effective rates of 34 percent, 33 percent and 32 percent,
respectively. Differences between taxes computed at the U.S. federal statutory
rate and the Company's reported income tax provision were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
($ IN MILLIONS) 2000 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax at U.S. statutory rate $266 $79 $55
State taxes 16 4 3
Foreign tax benefit (5) (3) (3)
Basis differentials and other (16) (5) (5)
- ------------------------------------------------------------------------------------------------
Income tax provision $261 $75 $50
- ------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 2000, the Company had approximately $51 million of regular tax
net operating loss carryforwards and $635 million of AMT net operating loss
carryforwards. The net operating loss carryforwards expire from 2006 through
2020. Certain provisions of the Internal Revenue Code place an annual limitation
on the Company's ability to utilize tax carryforwards existing as of the dates
of a 1995 and a 2000 business acquisition. Management believes such
carryforwards will be fully realized prior to expiration.
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-27
NOTE 9 - PREFERRED SECURITIES
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 of, 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. The Company may defer payment of interest on the
subordinated debentures as described in the indenture.
Illinois Power Financing Inc. ("IPFI"), is a statutory business trust in which
IP serves as sponsor. In 1996, IPFI issued $100 million aggregate liquidation
amount of 8% Trust Originated Preferred Securities ("TOPrS") in a private
transaction. The TOPrS mature on January 31, 2045 and may be redeemed at IP's
option, in whole or in part, from time to time on or after January 31, 2001 with
30 days notice.
Serial Preferred Securities of a Subsidiary of approximately $46 million
consists of six series of preferred stock issued by IP, with interest rates
ranging from 4.08% to 7.75%. Certain series are redeemable at the option of IP,
in whole or in part, at any time with not less than 30 days and not more than 60
days notice by publication.
NOTE 10 - MINORITY INTEREST
In June 2000, the Company contributed certain generating assets to a limited
liability company in exchange for a managing interest. A third-party investor
contributed $850 million in exchange for a
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-28
non-controlling, preferred interest that entitles it to an adjustable preferred
return related to an investment in certain generating facilities. The average
rate of return was 7.63% on an annualized basis. The limited liability company
is a separate legal entity from Dynegy and has separate assets, liabilities and
business plans. Absent certain events, Dynegy has the option to acquire the
minority investor's interest in the limited liability company. If Dynegy does
not acquire the minority investor's interest before June 2010, the limited
liability company will liquidate its assets and dissolve. The limited liability
company is a consolidated entity and the third-party investor's interest in the
limited liability company is reflected as a minority interest.
Minority interest on the consolidated balance sheet also includes third-party
investments in certain other consolidated entities, principally relating to
Dynegy Midstream Services ("DMS") operations and Dynegy Global Communications
("DGC"). The net pre-tax results attributed to minority interest holders in
consolidated entities are classified in other expenses in the accompanying
statements of operations.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS. On August 3, 1998, Modesto Irrigation District ("MID") filed
a lawsuit against PG&E and Destec Energy, Inc. ("Destec") in federal court for
the Northern District of California, San Francisco division. The lawsuit alleges
violation of federal and state antitrust laws and breach of contract against
Destec. The allegations are related to a power sale and purchase arrangement in
the city of Pittsburg, California. 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
again PG&E and Destec and restated its breach of contract claim against Destec.
PG&E and Destec filed motions to dismiss MID's revised federal and state
antitrust claims and a 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.
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-29
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. Oral arguments
before the Ninth Circuit are scheduled for March 15, 2001. Outside counsel
estimates that it could take as long as six months following the commencement of
oral arguments before the Ninth Circuit delivers a decision on the case.
Following dismissal of its federal court suit, MID filed suit in California
state court asserting breach of contract and tortuous interference with
prospective economic relations claims against Destec and tortuous interference
with contract and tortuous interference with prospective economic relations
claims against PG&E. Motions to dismiss MID's state court claims were heard by
the state court and by order dated April 6, 2000, MID was directed to amend its
complaint. MID filed its amended complaint on April 20, 2000, including Dynegy
as a defendant. Dynegy filed a motion to dismiss MID's amended complaint against
Dynegy, and the Court partially granted Dynegy's motion to dismiss while also
granting MID leave to amend its complaint. Before MID filed its amended
complaint, MID agreed with PG&E and Dynegy to execute a tolling agreement on all
claims and to dismiss the state court case until the federal appeal is decided.
After executing the tolling agreement, on October 23, 2000, MID filed in the
state court a Request for Dismissal, which the court granted on October 25,
2000. Dynegy believes the allegations made by MID are without merit 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 November 3, 1999, the United States Environmental Protection Agency ("EPA")
issued a Notice of Violation ("NOV") against IP and, with the Department of
Justice ("DOJ"), filed a complaint against IP in the U.S. District Court for the
Southern District of Illinois, No. 99C833. Subsequently, the DOJ and EPA amended
the NOV and complaint to include Illinova Power Marketing, Inc. (now know as
Dynegy Midwest Generation Inc. ("DMG")) (IP and DMG collectively the
"Defendants"). Similar notices and lawsuits have been filed against a number of
other utilities. Both the NOV and complaint allege violations of the Clean Air
Act and regulations thereunder. More specifically, both allege, based on the
same events, that certain equipment repairs, replacements and maintenance
activities at the Defendants' three Baldwin Station generating units constituted
"major modifications" under either or both the
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-30
Prevention of Significant Deterioration and the New Source Performance Standards
regulations. When non-exempt "major modifications" occur, the Clean Air Act and
related regulations generally require that generating facilities meet more
stringent emissions standards. The DOJ amended its complaint to assert the
claims found in the NOV. The Defendants filed an answer denying all claims and
asserting various specific defenses. By order dated April 19, 2000, a trial date
of November 2001 was set. The initial trial is limited to liability.
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 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 operations or production rate and
for increases in emissions resulting from demand growth. Although none of the
Defendants' other facilities are covered in the Complaint and NOV, the EPA has
officially requested information concerning activities at the Defendants'
Vermillion, Wood River and Hennepin Plants. It is possible that the EPA will
eventually commence enforcement actions against those plants as well. The
asset(s) subject to the Complaint are part of the consolidated assets of DHI.
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 the "best available control technology" (or the
equivalent) at the Baldwin Station and possibly at the other three plants as
well.
The parties are engaged in discovery, and numerous discovery-related disputes
have arisen. The United States Magistrate heard arguments on a number of the
discovery disputes in December 2000 and issued orders favorable to the
Defendants on most of the disputed issues.
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-31
Two utilities, Virginia Power and Cinergy, reached settlements with the United
States in 2000. The settlements call for the utilities to pay civil fines; fund
various environmental projects; reduce Nox, Sox, particulate matter and mercury
emissions through the installation of pollution control devices over a period
extending for 2012 through 2013, and forfeit certain emission credits. The
Company believes the allegations are without merit and will vigorously defend
this claim. In the opinion of management, the amount of ultimate liability with
respect to this action will not have a material adverse effect on the financial
position or results of operations of the Company.
The following five class action lawsuits have been filed against various Dynegy
entities, including Dynegy Inc. and Dynegy Power Marketing Inc.:
1. Gordon v. Reliant Energy Inc., et al. was filed on November 27, 2000 in San
Diego Superior Court. The defendants subsequently removed the case to United
States District Court for the Southern District of California. The named
plaintiffs have filed a motion to remand the case to the state court.
Plaintiffs' motion is awaiting a hearing.
2. Hendricks v. Dynegy Power Marketing Inc., et al. was filed on November 29,
2000 in San Diego Superior Court. The defendants subsequently removed the
case to the United States District Court for the Southern District of
California. The named plaintiffs have filed a motion to remand the case to
the state court. Plaintiff's motion is awaiting a hearing.
3. People of the State of California v. Dynegy Power Marketing Inc., et al. was
filed on January 18, 2001 in San Francisco Superior Court. The defendants
subsequently removed the case to the Federal Court. The named plaintiffs
have filed a motion to remand the case to the state court. Plaintiffs motion
is awaiting a hearing.
4. Pier 23 Restaurant v. PG & E Energy Trading, et al. was filed on
January 24, 2001 in San Francisco Superior Court. The defendants are in the
process of removing the case to federal court.
5. Sweetwater Authority et. al. v. Dynegy Inc., et al. was filed on
January 16, 2001 in San Diego Superior Court. The defendants are in the
process of removing the case to federal court.
The five class action lawsuits are based on the events occurring in the
California power market during the summer of 2000. The complaints allege
violations of California's Business and Professions Code, Unfair Trade Practices
Act and various other statutes. Specifically, the named plaintiffs allege that
the defendants, including the owners of in-state generation
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-32
and various power marketers, conspired to manipulate the California wholesale
power market to the detriment of California consumers. Included among the acts
forming the basis of the plaintiffs' claims are the alleged improper sharing of
generation outage data, improper withholding of generation capacity and the
manipulation of power market bid practices. The plaintiffs seek unspecified
treble damages.
The five lawsuits are at preliminary stages. Defendants have yet to file answers
and, as noted above, the suits have been removed to Federal Court. The named
plaintiffs have filed, or will shortly file, motions to remand the cases back to
California state court. The defendants in the five lawsuits have formed various
joint defense groups in an effort to coordinate the defense of the claims and to
share certain costs of defense. The Company believes the allegations are without
merit and will vigorously defend this claim. In the opinion of management, the
amount of ultimate liability with respect to this action will not have a
material adverse effect on the financial position or results of operations of
the Company.
On March 1, 2001, the California Independent System Operator Corporation (CAISO)
and California Electricity Oversight Board (EOB) filed a motion with the FERC
proposing, among other things, that they be given access to cost information
that generators have filed with the FERC and that the FERC keep all sales in
California subject to refund. Dynegy will vigorously oppose this action because
it believes that there is no basis for giving the State of California, a
significant market participant, access to confidential generator information on
bids and costs. In addition, Dynegy believes that there is no basis for the FERC
to extend refund exposure on a generic, blanket basis, as such an extension
would contradict the FERC's carefully crafted refund structure designed to
minimize the disincentives that refund exposure creates for suppliers.
Management has closely monitored developments in California in an effort to
manage Dynegy's credit risk in these markets. The Company has recorded
appropriate reserves for probable losses incurred based on year-end market
conditions. Although such reserves may change over time as the market
uncertainties are resolved, management believes such changes will not ultimately
be material to the Company's consolidated financial position or results of
operations.
The Company is subject to various legal proceedings and claims that arise in the
normal course of business. Further, in addition to certain disclosures made
previously herein, the Company has assumed liability
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-33
for various claims, assessments and litigation in connection with some of its
strategic acquisitions. In the opinion of management, the amount of ultimate
liability with respect to these actions will not have a material adverse effect
on the financial position or results of operations of the Company.
PURCHASE OBLIGATIONS. 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 business. These commitments are typically associated with commodity
supply arrangements, capital projects, reservation charges associated with firm
transmission, transportation, storage and leases for office space, equipment,
plant sites, ships and power generation assets. The following describes the more
significant commitments outstanding at December 31, 2000.
The Company is engaged in a continual capital asset expansion program consistent
with its business plan and energy convergence strategies. The emphasis of this
capital asset program is on the acquisition or construction of strategically
located power generation assets. Consistent with this strategy and as a result
of the long lead time required by industry manufacturers, the Company has
executed or is currently negotiating purchase orders to acquire in excess of 23
gas-fired turbines, representing a capital commitment of approximately $700
million. Delivery of the manufactured turbines is occurring ratably through
2004. 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 Company routinely enters into supply and market contracts for the purchase
and sale of electricity, some of which contain fixed capacity payments. Such
obligations are generally payable on a ratable basis, the terms of which extend
through May 2012. 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, which are not already recorded at fair value on the balance
sheet at December 31, 2000, totaled $125 million, which amount includes the
fixed capacity payments referenced above.
ADVANCE AGREEMENT. In 1997, Dynegy received cash from a gas purchaser as an
advance payment for future natural gas
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-34
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 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.
OTHER MINIMUM COMMITMENTS. During 2000, the Company entered into new or
restructured lease arrangements associated with a natural gas-fired generating
facility, certain electricity generating equipment, natural gas liquids
transportation assets and certain fiber optic and telecommunications-related
equipment. Under the terms of these arrangements, the Company provided certain
residual value guarantees associated with the leased assets while retaining
certain rights to the assets. The retained rights include the right to extend
the term of the lease arrangement, an option to acquire the leased assets from
each of the lessors and the right to participate in the outright sale of the
related assets.
In addition, certain Company subsidiaries are designing and constructing two
generating facilities and a telecommunications network, in each case as agent
for a third party. Pursuant to these contracts, under certain remote
circumstances, the Company is obligated to guarantee up to approximately 90
percent of the actual cost of these facilities during the construction phase. It
is anticipated that a subsidiary of the Company will subsequently lease the
completed facilities from the relevant third parties for initial terms of four
to five years. Under certain circumstances, the Company maintains an option to
purchase the relevant facility from the third party, and it may participate in
the outright sale of the asset.
Minimum commitments in connection with office space, equipment, plant sites,
ships, transportation, storage and other leased assets at December 31, 2000,
were as follows: 2001 - $178 million; 2002 $122 million; 2003 - $116 million;
2004 - $113 million and beyond - $268 million.
Aggregate minimum commitments have not been reduced by minimum sublease rentals
of approximately $4 million due in
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-35
the future under noncancelable subleases. Rental payments made under the terms
of these arrangements totaled - $142 million in 2000, $69 million in 1999 and
$126 million in 1998.
GUARANTEES. At December 31, 2000, the Company had parental guarantees of debt
of approximately $26 million in connection with its power generation projects.
The Company also had outstanding letters of credit of approximately $355 million
and a standby purchase agreement of $152 million.
ENVIRONMENTAL. 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 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 subject to environmental regulation operated by the Company. 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.
NOTE 12 - REGULATORY ISSUES
GENERAL. The Company is subject to regulation by various federal, state, local
and foreign agencies. These rules and regulations affect the industry as a
whole; therefore, the Company does not believe that it is affected in a manner
significantly different from its competitors.
ILLINOIS POWER COMPANY. IP is an electric utility as defined in the Public
Utility Holding Company Act of 1935 ("PUHCA"). Its direct parent company,
Illinova, and Dynegy are holding companies as defined in PUHCA. However,
Illinova and Dynegy generally are each exempt from regulation under section
3(a)(1) of PUHCA. They remain subject to regulation under PUHCA with respect to
the acquisition of certain voting securities of other domestic public
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-36
utility companies and utility holding companies.
In recent years, several bills have been introduced in Congress that would
repeal PUHCA. Repeal or significant modification to PUHCA could affect the
Company and the electric utility industry generally. The Company cannot predict
the outcome of the repeal efforts or the outlook for additional legislation in
2001.
IP also is subject to regulation by the Federal Power Act ("FPA") and the
Federal Energy Regulatory Commission ("FERC") as to transmission rates and
certain other matters. The FERC has declared IP exempt from the Natural Gas Act
of 1938 and related FERC orders, rules and regulations.
IP is further subject to regulation by the State of Illinois and ICC. The
Illinois Public Utilities Act was significantly modified in December 1997 by the
Electric Service Customer Choice and Rate Relief Law of 1997, or P.A. 90-561,
but the ICC still has broad powers of supervision and regulation with respect to
IP's rates and charges and various other matters. Under P.A. 90-561, IP must
continue to provide bundled retail electric services to all who choose to
continue to take service at tariff rates and must provide unbundled electric
distribution services to all eligible customers as defined by P.A. 90-561 at
rates determined by the ICC.
Among other things, P.A. 90-561 also required IP to participate in an
independent system operator, or ISO. To that end, in January 1998, IP, in
conjunction with eight other transmission-owning entities, filed with the FERC
for all approvals necessary to create and to implement the Midwest Independent
Transmission System Operator, Inc. ("MISO"). On September 20, 2000, IP announced
its intention to withdraw its participation in the MISO and to become a member
of the Alliance Regional Transmission Organization ("Alliance RTO"), pending
approval from necessary regulatory bodies including FERC. On October 13, 2000,
IP filed a notice of its intent to withdraw from the MISO with FERC. On
December 22, 2000, IP signed an agreement to join the Alliance RTO, which was
filed with the FERC on January 16, 2001. On February 23, 2001, IP reached a
settlement in principle with all parties that allows it to withdraw from the
MISO and join the Alliance RTO, effective upon FERC approval of the settlement,
which is expected to occur in mid-April 2001. IP has accrued an adequate amount
to cover its share of the settlement obligation. While the Company believes that
being part of the Alliance RTO would provide IP greater flexibility, cost
savings and maintained transmission reliability, the outcome of IP's
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-37
withdrawal cannot be predicted with certainty.
NOTE 13 - CAPITAL STOCK
At December 31, 2000, the Company had authorized capital stock consisting of
300,000,000 shares of Class A Common Stock, 120,000,000 shares of Class B Common
Stock and 50,000,000 shares, par value $0.01 per share of preferred stock.
PREFERRED STOCK. The Company's preferred stock may be issued from time to time
in one or more series, the shares of each series to have such designations and
powers, preferences, rights, qualifications, limitations and restrictions
thereof as described in the Company's Certificate of Incorporation.
In addition, as part of the Illinova Acquisition, 8,000,000 shares of preferred
stock, previously designated as Dynegy Series A Participating Preferred Stock
("Series A Preferred"), were converted to shares of Class B Common Stock 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 ("BG") and NOVA Corporation ("NOVA") in
accordance with the exchange ratios provided in the acquisition documents. On
the effective date of the acquisition, BG and NOVA held an aggregate 6.7 million
shares of this Series A Convertible Preferred Stock. All of these shares were
converted into shares of Class A Common Stock in the second quarter of 2000.
COMMON STOCK. At December 31, 2000, there were 322,721,346 shares of Class A
and B Common Stock issued, and 70,000 shares were held in treasury. During 2000,
Dynegy paid quarterly cash dividends on its common stock of $.022 per share for
the first quarter and $.075 per share for each the second, third, and fourth
quarter, or $0.247 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. All of the Class B Common Stock is
owned by Chevron. 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
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-38
the shareholders except for the following matters:
- - 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;
- - 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 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
- - 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 preferred stock, holders of Class A and Class B
Common Stock have equal ratable rights to dividends, when and if dividends are
declared by the board of directors. Holders of Class A 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
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-39
redemption rights, except that Chevron 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.
During 2000, Dynegy sold approximately 22.6 million shares of common stock. The
offerings included approximately 18.4 million shares of Class A Common Stock
sold to the public and approximately 4.2 million shares of Class B Common Stock
sold to Chevron in private transactions, pursuant to pre-emptive rights under
Chevron's stockholder agreement. Total net proceeds to Dynegy from these sales
approximated $858 million, net of underwriting commissions and expenses of
approximately $10 million. Additionally, Chevron purchased $200 million of
Class B Common Stock concurrent with the acquisition of Illinova. Proceeds from
the offerings were used to reduce commercial paper borrowings and to finance the
Company's development and acquisition program.
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-40
In the second quarter of 2000, a non-recurring special dividend payment of $31.8
million was made to BG and NOVA prior to the conversion of their preferred
shares to Class A Common Stock.
Common stock activity (in millions) for the three years ended December 31, 2000
was as follows:
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Common Stock
Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997 209 $ 1 - $ - - $ -
Options exercised 1 - - - - -
401(k) plan and profit sharing 1 - - - - -
- -----------------------------------------------------------------------------------------------------------
December 31, 1998 211 1 - - - -
Options exercised 5 - - - - -
401(k) plan and profit sharing 1 - - - - -
- -----------------------------------------------------------------------------------------------------------
December 31, 1999 217 1 - - - -
ILLINOVA ACQUISITION (217) (1) 195 1,168 81 650
COMMON STOCK ISSUED - - 18 748 4 110
PREFERRED STOCK CONVERSION - - 12 - - -
EXTANT ACQUISITION - - 2 90 - -
OPTIONS EXERCISED - - 9 157 - -
401(K) PLAN AND PROFIT SHARING - - 1 12 - -
OPTIONS GRANTED - - - 15 - -
- -----------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000 - $ - 237 $2,190 85 $760
- -----------------------------------------------------------------------------------------------------------
</TABLE>
STOCK OPTIONS. Each option granted is valued at an option price, which ranges
from $1.47 per share to the fair market value per share at date of grant. The
difference, if any, between the option price and the fair market value of each
option on the date of grant is recorded as compensation expense over the
respective 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, 2000 was $7.93. Compensation expense related to
options granted totaled $15.4 million, $6.0 million and $4.7 million for the
years ended December 31, 2000, 1999 and 1998, respectively. Total options
authorized and non-distributed stock option transactions for 2000, 1999, and
1998 were (shares in thousands) as follows:
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-41
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------------
2000 1999 1998
SHARES OPTION PRICE SHARES OPTION PRICE SHARES OPTION PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period 24,022 $1.47 - $16.62 25,777 $1.47 - $15.67 19,341 $1.47 - $15.67
Granted 7,197 $10.44 - $57.02 4,203 $1.47 - $16.62 10,100 $1.47 - $12.68
Exercised (8,592) $1.47 - $22.21 (4,658) $1.47 - $13.68 (1,373) $1.47 - $ 6.80
Cancelled or expired (1,096) $1.47 - $57.02 (1,232) $1.47 - $13.77 (2,164) $1.47 - $13.77
Other, contingent share
issuance - - (68) $1.47 - $ 4.10 (127) $1.47 - $ 4.10
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of
period 21,531 $1.47 - $57.02 24,022 $1.47 - $16.62 25,777 $1.47 - $15.67
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of
period 12,779 $1.47 - $23.83 9,983 $1.47 - $15.67 6,064 $1.47 - $15.67
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average fair
value of options
granted during the
period at market $14.40 $7.76 $4.18
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average fair
value of options
granted during the
period at below market $24.10 $9.65 $5.33
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Options outstanding as of December 31, 2000 (shares in thousands) are summarized
below:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- --------------------------------------
Weighted Average
Remaining Weighted
Range of Number of Shares Contractual Life Average Number of Shares Weighted Average
Exercise Price Outstanding (Years) Exercise Price Exercisable Exercise Prices
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.47 - $ 4.80 9,377 7.3 $ 2.88 5,926 $ 2.41
$ 4.81 - $ 9.80 191 7.1 $ 7.53 191 $ 7.53
$ 9.81 - $12.50 3,067 7.1 $10.28 3,067 $10.28
$12.51 - $16.70 6,976 7.6 $15.74 3,553 $14.99
$16.71 - $23.90 1,020 8.7 $23.10 42 $20.28
$23.91 - $36.90 290 9.4 $31.92 - -
$36.91 - $44.00 427 9.6 $42.72 - -
$44.01 - $57.02 183 9.8 $52.28 - -
- -------------------------------------------------------------------------------------------------------------------------
$ 1.47 - $57.02 21,531 12,779
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to terms of the Illinova acquisition, certain vesting requirements on
outstanding options were accelerated and the option shares and strike prices
were subject to the exchange ratios described in the acquisition documents.
Additionally, Dynegy instituted new option plans on the effective date of the
acquisition.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model, with the
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-42
following weighted-average assumptions used for grants in 2000, 1999 and 1998:
dividend per year of $0.30 per share per annum for 2000 and historical dividend
of $0.04 per share for 1999 and 1998; expected volatility of 42.1 percent, 40.3
percent and 40.1 percent, respectively; risk-free interest rate of 6.10 percent,
6.42 percent and 6.28 percent, respectively; and an expected life of ten years
for all periods. As stated previously, the Company accounts for its stock option
plan in accordance with APB No. 25. Had compensation cost been determined on a
fair value basis consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and per share amounts would have
approximated the following pro forma amounts for the years ended December 31,
2000, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
2000 1999 1998
NET DILUTED NET DILUTED NET DILUTED
($ IN MILLIONS, EXCEPT PER SHARE DATA) INCOME EPS INCOME EPS INCOME EPS
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pro forma amounts $485 $1.43 $143 $0.62 $105 $0.46
- ---------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 14 - BUSINESS COMBINATIONS AND OTHER ACQUISITIONS
Dynegy completed its acquisition of Illinova on February 1, 2000. The merger of
Dynegy and Illinova involved the creation of a new holding company, now known as
Dynegy Inc., and two separate but concurrent mergers. In one merger, a wholly
owned subsidiary of Dynegy Inc. merged with and into Illinova. In the other
merger, a second wholly owned subsidiary of Dynegy Inc. merged with and into
former Dynegy. As a result of these two concurrent mergers, Illinova and the
former Dynegy continue to exist as wholly owned subsidiaries of Dynegy Inc. and
are referred to as Illinova Corporation and Dynegy Holdings Inc., respectively.
Dynegy accounted for the acquisition as a purchase of Illinova. This accounting
treatment is based on various factors present in the merger, including the
majority ownership (and voting control) of Dynegy's shareholders following the
merger, the role of Dynegy's management following the merger and the influence
of Chevron, resulting from the size of its ownership interest and its rights
under a shareholder agreement, the articles of incorporation and bylaws. As a
result, the consolidated financial statements of Dynegy after the merger reflect
the assets and liabilities of former Dynegy at historical book values and the
assets and liabilities of Illinova at allocated fair values. For accounting
purposes, the effective date of the merger was January 1, 2000.
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-43
In the combination, Dynegy shareholders, other than Chevron, NOVA and BG,
elected to exchange each former Dynegy share for 0.69 of a share of Dynegy
Class A Common Stock, based on a fixed exchange ratio, or elected to receive
$8.25 per share in cash consideration, subject to proration. NOVA and BG elected
cash and thereby reduced their respective ownership in Dynegy as part of this
combination. Additionally, instead of receiving Dynegy Class A Common Stock in
exchange for their respective shares of former Dynegy common stock, NOVA and the
parent of BG each received a combination of cash, subject to proration, and
shares of Dynegy Series A Convertible Preferred Stock. Chevron received 0.69 of
a share of Dynegy Class B Common Stock in exchange for each share of former
Dynegy common stock and Series A Participating Preferred Stock. 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 $1.1 billion.
Dynegy financed the cash component of the acquisition initially with borrowings
under a debt facility and the issuance of $200 million of Class B Common Stock
to Chevron. On a long-term basis, Dynegy financed the acquisition of Illinova
through a combination of sales of common equity, the disposition of certain
non-strategic assets, the refinancing of Illinova's unregulated generation
assets and cash flow derived from its operations.
The results of operations of the acquired Illinova assets are consolidated with
Dynegy's operations beginning January 1, 2000. The following table reflects
certain unaudited pro forma information for the period presented as if the
Illinova acquisition had taken place on January 1, 1999 (in millions, except per
share data). Unaudited pro forma results for the year ended December 31, 1999
include non-recurring after-tax gains of $41.8 million, or $0.15 per diluted
share.
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
- ---------------------------------------------
<S> <C>
Pro forma revenues $17,655
Pro forma net income 218
Pro forma earnings per share 0.68
</TABLE>
On September 29, 2000, Dynegy completed the acquisition of Extant, Inc., a
privately
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-44
held communications solutions company providing centralized clearinghouse
services, OSS (Operations Support System) integration and network expansion
capabilities to communications service providers. Dynegy's net investment
consists of $92 million in cash and 1.8 million shares of Class A common stock.
Following the transaction, Dynegy established Dynegy Global Communications, a
new segment that, in addition to pursuing other communications opportunities,
owns 80 percent of a limited partnership called DynegyCONNECT, L.P. which
conducts many of the activities previously conducted by Extant, Inc.
NOTE 15 - 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
("ERISA"). 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 and are subject to the laws of each country. Eligible
employees may participate in the Plan. Employee contributions to the Plan are
matched 100%, subject to a maximum of five percent of compensation. Vesting in
Company contributions is based on years of service. The Company makes additional
profit sharing contributions to employee accounts regardless of their individual
participation in the Plan. The Company may also make discretionary profit
sharing contributions, subject to Company performance. Matching contributions to
the Plan and discretionary profit sharing contributions are made in Company
common stock. Additional profit sharing contributions are made in cash.
Eligible employees participate in the Illinois Power Company Incentive Savings
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 ERISA. The
Company matches 50% of employee contributions to the Illinois Power Company
Incentive Savings Plan. The Company guaranteed match is subject to a maximum of
six percent of compensation. Employees are
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-45
immediately 100% vested in Company contributions. Matching contributions to the
Plan are made in Company common stock.
During the years ended December 31, 2000, 1999 and 1998, Dynegy recognized
aggregate costs related to these employee compensation plans of $34.8 million,
$24.9 million and $12.9 million, respectively.
PENSION AND OTHER POST-RETIREMENT BENEFITS. Through business combinations, the
Company has acquired and continues to sponsor various defined benefit pension
plans and post-retirement benefit plans. Some but not all employees of the
Company participate in these plans. The following tables contain information
about these plans on a combined basis:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
($ IN MILLIONS) 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Projected benefit obligation, beginning of the year $ 9 $ 11 $ - $ -
Business combination 424 - 97 -
Service cost 10 1 2 -
Interest cost 33 1 7 -
Curtailment - (2) - -
Actuarial (gain) loss (3) (1) (1) -
Benefits paid (25) (1) (5) -
- -----------------------------------------------------------------------------------------------------------
Projected benefit obligation, end of the year $ 448 $ 9 $ 100 $ -
- -----------------------------------------------------------------------------------------------------------
Fair value of plan assets, beginning of the year $ 10 $ 9 $ - $ -
Business combination 579 - 80 -
Actual return on plan assets 63 2 (4) -
Employer contributions - - 12 -
Participant contributions - - 1 -
Benefits paid (25) (1) (6) -
- -----------------------------------------------------------------------------------------------------------
Fair value of plan assets, end of the year $ 627 $ 10 $ 83 $ -
- -----------------------------------------------------------------------------------------------------------
Funded status $ 179 $ 1 $ (17) $ -
Unrecognized actuarial (gain) loss (17) (5) 10 -
- -----------------------------------------------------------------------------------------------------------
Net amount recognized $ 162 $ (4) $ (7) $ -
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-46
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
($ IN MILLIONS) 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Amounts recognized in the consolidated balance sheets
consist of:
Prepaid benefit cost $ 167 $ - $ - $ -
Accrued benefit liability (5) (4) (7) -
- -----------------------------------------------------------------------------------------------------------
Net amount recognized $ 162 $ (4) $ (7) $ -
- -----------------------------------------------------------------------------------------------------------
Weighted Average Assumptions:
Discount rate at December 31 7.99% 7.50% 8.00% -
Expected return on plan assets as of January 1 9.47% 8.00% 9.50% -
Rate of compensation increase 4.48% 3.50% 4.50% -
Medical trend - initial trend - - 6.70% -
Medical trend - ultimate trend - - 5.50% -
Medical trend - year of ultimate trend - - 2005 -
</TABLE>
The changes in the projected benefit obligation and in plan assets attributable
to business combination in 2000 are the result of the acquisition of Illinova.
The components of net periodic benefit cost were:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
($ IN MILLIONS) 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost benefits earned during period $ 10 $ 1 $ 2 $ -
Interest cost on projected benefit obligation 33 1 7 -
Expected return on plan assets (53) (1) (7) -
Amortization of unrecognized actuarial gain (1) - - -
- -------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ (11) $ 1 $ 2 $ -
Additional income due to curtailment - (2) - -
- -------------------------------------------------------------------------------------------------------
Total net periodic benefit cost / (income) $ (11) $ (1) $ 2 $ -
- -------------------------------------------------------------------------------------------------------
</TABLE>
Impact of a 1% increase/decrease in medical trend:
<TABLE>
<CAPTION>
($ in millions) Increase Decrease
- ---------------------------------------------------------------------------------
<S> <C> <C>
Aggregate impact on service cost and interest cost $ 1 $(1)
Impact on accumulated post-retirement benefit obligation $10 $(9)
</TABLE>
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-47
NOTE 16 - RELATED PARTY TRANSACTIONS
Transactions with Chevron result from purchases and sales of natural gas,
natural gas liquids and crude oil between subsidiaries of Dynegy and Chevron
affiliates. Management believes that these transactions are executed at the
prevailing market rates. During the years ended December 31, 2000, 1999 and
1998, the Company recognized in its statement of operations aggregate sales to,
and aggregate costs from, this significant shareholder of $1.4 billion and $3.1
billion, $1.1 billion and $2.0 billion, and $888 million and $1.7 billion,
respectively.
NOTE 17 - SEGMENT INFORMATION
Dynegy's operations are divided into four reportable segments: Dynegy Marketing
and Trade ("DMT"), Dynegy Midstream Services ("DMS"), Transmission and
Distribution and Dynegy Global Communications ("DGC'). DMT focuses on energy
convergence, including the marketing and trading and arbitrage opportunities
that exist among power, natural gas, weather derivatives and coal that can be
enhanced by the control and optimization of related physical assets. DMS
consists of the North American midstream liquids operations, as well as the
international liquefied petroleum gas transportation and NGL marketing
operations located in Houston and London. Dynegy's Transmission and Distribution
segment consists of the operation of IP. DGC is engaged in pursuing and
capturing opportunities in the converging energy and communications marketplace.
Generally, Dynegy accounts for intercompany transactions at prevailing market
rates. Operating segment information for 2000, 1999 and 1998 is presented below.
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-48
DYNEGY'S SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 2000
<TABLE>
<CAPTION>
Transmission
and
($ in millions) DMT DMS Distribution DGC Elimination Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic $17,894 $5,160 $1,581 $ 2 $ - $24,637
Canadian 2,316 1,224 - - - 3,540
European & Other 1,268 - - - - 1,268
- -----------------------------------------------------------------------------------------------------
21,478 6,384 1,581 2 - 29,445
Intersegment revenues
Domestic 1,357 940 27 - (2,324) -
Canadian 132 14 - - (146) -
European & Other - - - - - -
- -----------------------------------------------------------------------------------------------------
1,489 954 27 - (2,470) -
- -----------------------------------------------------------------------------------------------------
Total revenues 22,967 7,338 1,608 2 (2,470) 29,445
- -----------------------------------------------------------------------------------------------------
Operating margin 770 256 433 - - 1,459
Depreciation and amortization (125) (105) (156) (3) - (389)
Interest expense (89) (30) (129) (3) - (251)
Other income (expense) 141 (50) 3 2 - 96
Equity earnings of
unconsolidated affiliates 181 24 - - - 205
Income tax (provision)
benefit (233) (10) (24) 6 - (261)
Net income (loss) $ 441 $ 19 $ 53 $(12) $ - $ 501
Identifiable assets:
Domestic $13,630 $2,156 $3,577 $277 $ - $19,640
Canadian 750 299 - - - 1,049
European & Other 644 - - 73 - 717
Investment in unconsolidated
affiliates 625 174 - - - 799
Capital expenditures and
investment in
unconsolidated affiliates (623) (114) (158) (15) - (910)
</TABLE>
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-49
DYNEGY'S SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Transmission
and
($ in millions) DMT DMS Distribution DGC Elimination Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic $ 8,112 $4,887 $ - $ - $ - $12,999
Canadian 1,445 10 - - - 1,455
European 976 - - - - 976
- -------------------------------------------------------------------------------------------------------
10,533 4,897 - - - 15,430
- -------------------------------------------------------------------------------------------------------
Intersegment revenues
Domestic 355 240 - - (595) -
Canadian 59 8 - - (67) -
European - - - - - -
- -------------------------------------------------------------------------------------------------------
414 248 - - (662) -
- -------------------------------------------------------------------------------------------------------
Total revenues 10,947 5,145 - - (662) 15,430
- -------------------------------------------------------------------------------------------------------
Operating margin 284 260 - - - 544
Depreciation and amortization (35) (94) - - - (129)
Interest expense (36) (42) - - - (78)
Other income (expense) 26 2 - - - 28
Equity earnings of
unconsolidated affiliates 62 18 - - - 80
Income tax provision (58) (17) - - - (75)
Net income $ 106 $ 46 $ - $ - $ - $ 152
Identifiable assets:
Domestic $ 3,466 $2,550 $ - $ - $ - $ 6,016
Canadian 266 68 - - - 334
European 175 - - - - 175
Investment in unconsolidated
affiliates 458 169 - - - 627
Capital expenditures and
investment in unconsolidated
affiliates (357) (92) - - - (449)
</TABLE>
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-50
DYNEGY'S SEGMENT DATA FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Transmission
and
($ in millions) DMT DMS Distribution DGC Elimination Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Unaffiliated revenues:
Domestic $ 9,149 $3,307 $ - $ - $ - $12,456
Canadian 970 210 - - - 1,180
European 622 - - - - 622
- -------------------------------------------------------------------------------------------------------
10,741 3,517 - - - 14,258
- -------------------------------------------------------------------------------------------------------
Intersegment revenues
Domestic 158 250 - - (408) -
Canadian 61 - - - (61) -
European - - - - - -
- -------------------------------------------------------------------------------------------------------
219 250 - - (469) -
- -------------------------------------------------------------------------------------------------------
Total revenues 10,960 3,767 - - (469) 14,258
- -------------------------------------------------------------------------------------------------------
Operating margin 236 193 - - - 429
Depreciation and amortization (29) (84) - - - (113)
Interest expense (25) (50) - - - (75)
Other income (expense) 4 35 - - - 39
Equity earnings of
unconsolidated affiliates 75 16 - - - 91
Income tax (provision) benefit (52) 2 - - - (50)
Net income $ 91 $ 17 $ - $ - $ - $ 108
Identifiable assets:
Domestic $ 2,838 $2,037 $ - $ - $ - $ 4,875
Canadian 257 7 - - - 264
European 125 - - - - 125
Investment in unconsolidated
affiliates 344 159 - - - 503
Capital expenditures and
investments in unconsolidated
affiliates (257) (119) - - - (376)
</TABLE>
<PAGE>
DYNEGY FORM 10-K
DYNEGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-51
NOTE 18 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the Company's unaudited quarterly financial
information for the years ended December 31, 2000 and 1999.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
($ IN MILLIONS, EXCEPT PER SHARE DATA) 2000 2000 2000 2000
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $5,349 $5,720 $8,366 $10,010
OPERATING MARGIN 383 308 381 387
INCOME BEFORE INCOME TAXES 114 139 351 158
NET INCOME 69 91 235 106
NET INCOME PER SHARE 0.23 0.19 0.73 0.32
<CAPTION>
Quarter Ended
--------------------------------------------
March June September December
($ in millions, except per share data) 1999 1999 1999 1999
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $3,045 $3,161 $4,585 $ 4,639
Operating margin 120 126 159 139
Income before income taxes 41 42 76 68
Net income 28 28 51 45
Net income per share 0.12 0.12 0.22 0.19
</TABLE>
NOTE 19 - SUBSEQUENT EVENTS
In the first quarter of 2001, Dynegy expanded its energy convergence business
into the northeastern United States with the acquisition of 1,700 megawatts of
power generation facilities with the Central Hudson acquisition. These
facilities are located approximately 50 miles north of New York City and were
acquired for $903 million, plus certain working capital adjustments.
Also in the first quarter of 2001, the Company finalized the acquisition of
iaxis Limited, a previously privately held, London-based communications company.
Dynegy's shareholders approved an amendment to its Articles of Incorporation,
which increased the number of authorized shares to 900 million for Class A
Common Stock and 360 million for Class B Common Stock in the first quarter of
2001.
<PAGE>
DYNEGY FORM 10-K
F-52
SCHEDULE I
<TABLE>
<CAPTION>
DYNEGY INC.
CONDENSED BALANCE SHEETS OF REGISTRANT DECEMBER 31, December 31,
(IN MILLIONS, EXCEPT SHARE DATA) 2000 1999
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Accounts receivable $ - $ 3
Intercompany accounts receivable 76 709
Prepayments and other assets - 10
- -------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 76 722
- -------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT - 3
Less: accumulated depreciation - (3)
- -------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET - -
- -------------------------------------------------------------------------------------------
OTHER ASSETS
Investments in affiliates 3,691 1,764
Intercompany note receivable - 501
Deferred taxes and other assets - 30
- -------------------------------------------------------------------------------------------
TOTAL ASSETS $3,767 $3,017
- -------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 42 $ -
Accrued liabilities (47) 127
- -------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES (5) 127
- -------------------------------------------------------------------------------------------
LONG-TERM DEBT - 1,299
OTHER LIABILITIES 174 82
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES 169 1,508
- -------------------------------------------------------------------------------------------
COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST - 200
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, 5,392,600 shares issued and
outstanding at December 31, 1999 - 75
Common stock, $0.01 par value, 400,000,000 shares
authorized: 217,348,621 shares issued at December 31, 1999 - 1
Class A Common Stock, no par value, 300,000,000 shares
authorized; 237,390,802 shares issued and outstanding at
December 31, 2000 2,190 -
Class B Common Stock, no par value, 120,000,000 shares
authorized; 85,330,544 shares issued and outstanding at
December 21, 2000 760 -
Additional paid-in capital - 973
Accumulated other comprehensive income (loss), net of tax (15) -
Retained earnings 666 277
Less: treasury stock, at cost: 70,000 shares at
December 31, 2000 and 1,656,966 shares at December 31,
1999 (3) (17)
- -------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,598 1,309
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,767 $3,017
- -------------------------------------------------------------------------------------------
</TABLE>
SEE NOTE TO REGISTRANT'S FINANCIAL STATEMENTS.
<PAGE>
DYNEGY FORM 10-K
F-53
SCHEDULE I
<TABLE>
<CAPTION>
DYNEGY INC.
STATEMENTS OF OPERATIONS OF THE REGISTRANT Year Ended December 31,
(IN MILLIONS) 2000 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Impairment, abandonment and other charges $ - $ - $ (1)
- ----------------------------------------------------------------------------------------
Operating loss - - (1)
Equity in earnings of affiliates 774 249 215
Intercompany interest and other income - 66 14
Interest expense (12) (83) (69)
Other expenses - (5) (1)
- ----------------------------------------------------------------------------------------
Income before income taxes 762 227 158
Income tax provision 261 75 50
- ----------------------------------------------------------------------------------------
NET INCOME $501 $152 $108
- ----------------------------------------------------------------------------------------
</TABLE>
SEE NOTE TO REGISTRANT'S FINANCIAL STATEMENTS.
<PAGE>
DYNEGY FORM 10-K
F-54
SCHEDULE I
<TABLE>
<CAPTION>
DYNEGY INC.
STATEMENTS OF CASH FLOWS OF THE REGISTRANT Year Ended December 31,
(IN MILLIONS) 2000 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 501 $ 152 $ 108
Items not affecting cash flows from operating activities:
Depreciation and amortization - - 2
Equity in earnings of affiliates, net of cash
distributions (774) (249) (215)
Deferred taxes 131 63 50
Other - - -
Change in assets and liabilities resulting from operating
activities:
Accounts receivable 3 (3) (1)
Intercompany transactions 342 (574) 239
Prepayments and other assets 9 (3) (2)
Accounts payable 42 - -
Accrued liabilities (76) 9 4
Other, net 59 25 (30)
- -------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 237 (580) 155
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - - -
Acquisitions (1,252) - (2)
Other - - -
- -------------------------------------------------------------------------------------------
Net cash used in investing activities (1,252) - (2)
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings - 397 212
Repayments of long-term borrowings - - (493)
Net proceeds from commercial paper and money market lines of
credit - (42) 350
Proceeds from sale of capital stock, options and warrants 1,130 22 4
Treasury stock acquisitions (3) - (7)
Dividends and other distributions (112) (8) (8)
Other financing - 2 (2)
- -------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,015 371 56
- -------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents - (209) 209
Cash and cash equivalents, beginning of period - 209 -
- -------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ - $ - $ 209
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid (net of amount capitalized) $ 12 $ 98 $ 101
- -------------------------------------------------------------------------------------------
Taxes paid (net of refunds) $ 40 $ 2 $ (8)
- -------------------------------------------------------------------------------------------
</TABLE>
SEE NOTE TO REGISTRANT'S FINANCIAL STATEMENTS.
<PAGE>
DYNEGY FORM 10-K
F-55
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 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 at December 31, 2000 and 1999, and for
the three years ended December 31, 2000, respectively. These statements should
be read in conjunction with the Consolidated Statements and notes thereto of
Dynegy Inc.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.9
<SEQUENCE>2
<FILENAME>a2041096zex-10_9.txt
<DESCRIPTION>EXHIBIT 10.9
<TEXT>
<PAGE>
December 15, 1999
Mr. Robert D. Doty, Jr.
#1 Pine Crescent Ct.
Houston, TX 77024
Dear Rob:
Set forth below are the terms of your employment (the "Agreement")
with Dynegy Inc. (hereinafter referred to collectively as "Dynegy" or the
"Company").
1. TITLE AND DUTIES
Your title shall be Senior Vice President, Finance, Dynegy Inc. You
shall have such duties as may be delegated from time to time by your
immediate supervisor. You will be employed at Dynegy's headquarters in
Houston, Texas. You shall devote your full time, energy and skill to the
performance of your duties for Dynegy, and will exercise due diligence and
reasonable care in the performance of such duties.
2. TERM
(a) Unless earlier terminated as provided for herein, the
term of this Agreement will be for three (3) years, beginning 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 sixty (60) days prior to the date on which this Agreement
would otherwise be automatically extended that such party is electing not to
so extend the Term. The term "Effective Date" means the date of closing of
the proposed merger of Dynegy Inc. and Illinova Corporation pursuant to that
certain merger agreement dated as of June 14, 1999, as amended.
(b) If your employment with Dynegy is terminated due to your
voluntary resignation or by the Company for "cause", this Agreement shall
terminate immediately (except for the confidentiality, non-competition and
non-solicitation provisions of Paragraph 4 and the provisions of Paragraphs 5
and 6), and the Company shall have no further obligation to you except for
the payment of amounts due before the date of such termination. You further
agree that the benefits which you have received from the execution of this
Agreement through the date of such termination constitute sufficient
consideration for your obligations pursuant to Paragraph 4, notwithstanding
the fact that the Company has no further obligation to you except for the
payment of amounts due before the date of such termination.
<PAGE>
Mr. Robert D. Doty, Jr.
December 15, 1999
Page 2
For purposes of this Agreement, you may be terminated for "cause" as
a result of (i) your refusal to implement or adhere to lawful policies or
lawful directives of the Board of Directors of Dynegy (the "Board of
Directors") or your immediate supervisor; (ii) serious misconduct, dishonesty
or disloyalty, directly related to the performance of duties for the Company
or gross negligence in the performance of your duties for the Company; (iii)
your being convicted (or entering into a plea bargain admitting or not
contesting criminal guilt) in any felony criminal proceeding; (iv) drug or
alcohol abuse; (v) continued failure to perform your duties under this
Agreement which is not cured within 10 days after written notice of such
failure is provided to you by Dynegy; or (vi) any other material breach of
this Agreement by you that is not cured within ten (10) days after written
notice of such breach is delivered to you from the Company.
(c) If your employment is terminated during the Term of this
Agreement due to resignation following "constructive termination" (as defined
below) or for any other reason other than your voluntary resignation, death,
disability, or discharge for cause, you shall receive as your sole
compensation in lieu of further payments to you pursuant to Paragraph 3 hereof
(i) a lump sum amount equal to the product of (x) 2.99 and (y) the greater of
(a) the average annual Base Salary and incentive compensation, whether payable
in cash or stock options, you were paid by the Company for the highest three
(3) calendar years preceding the calendar year in which your employment is
terminated (or such shorter period as you have actually been employed by the
Company), or (b) your Base Salary and target bonus amount for the year in
which your employment is terminated; (ii) a lump sum amount equal to the
present value, as determined by the Board of Directors in its sole and
absolute discretion, of the benefits to be provided to you in Paragraph 3(e)
of this Agreement and such other perquisites (if any) being provided to you
on the date of your termination, as if you were still employed for the
remainder of the Term of this Agreement, with regard to those benefits to be
provided to you during the Term of this Agreement, and as if you had
completed the Term of this Agreement with regard to those benefits to be
provided to you upon completion of the Term of this Agreement; (iii) any
employee stock options granted to you prior to or during the Term of this
Agreement shall become vested as of the date of resignation due to such
constructive termination or discharge not for cause, and you shall have the
right to exercise any such vested options through the end of the Term of this
Agreement or one year from the date of termination, whichever is later; and
(iv) for a period of thirty-six (36) months from the date of resignation due
to such constructive discharge or discharge due not for cause, all health and
welfare benefits the Company was maintaining for you and your family as of
the date of such resignation or discharge.
For purposes of this Agreement a "constructive termination" shall be
deemed to have occurred in the event that (i) your Base Salary as defined in
Paragraph 3(a), bonus compensation under Paragraph 3(b), target range of
annual option grants under Paragraph 3(c) or other compensation as described
in Paragraph 3(e) is reduced; (ii) a significant diminution in your
responsibilities, authority or scope of duties is effected, and such
diminution is made without your written consent (without regard to whether or
not any change is made to your title); (iii) the Company materially breaches
this Agreement or (iv) the relocation of the Company's principal executive
offices to a location, or the Company requires you to be based, outside a
fifty (50) mile radius from the city limits of Houston, Texas. Any
resignation by you as a result of
<PAGE>
Mr. Robert D. Doty, Jr.
December 15, 1999
Page 3
assertion of a constructive termination shall be communicated by delivery to
the Board of Directors of the Company within thirty (30) days from the
commencement of such constructive termination by written notice setting forth
the grounds therefor, during which period the Company shall be entitled to
cure or remedy the matters set forth in such notice to your reasonable
satisfaction.
Unless you withdraw such notice prior to the expiration of such
thirty (30) day period, such resignation shall take effect upon the
expiration of thirty days from the date of the delivery of such notice. Any
other resignation by you shall be communicated by thirty days' advance
written notice.
If you die, or become disabled and cannot perform your duties, your
employment hereunder shall be terminated and: (i) you (or your estate) shall
be entitled to the Base Salary (as defined in Paragraph 3(a)) payable to you
hereunder for twelve (12) months following the month in which you die or
become disabled, plus the amount of any target bonus as described in
Paragraph 3(b) for the year of death or disability, prorated for the period
of twelve (12) months following the date of death or disability; (ii) you (or
your estate) shall receive, for a period of twenty-four (24) months from the
date of your death or disability, all health insurance and health benefits
that the Company was maintaining for you and/or your estate and for your
family as of the date of your death or disability; and (iii) any employee
stock options granted to you during the Term of this Agreement shall become
vested as of the date of your death or disability. For purposes of this
Agreement, you shall be disabled as of the first date on which you become
eligible to receive disability benefits under the Company's long-term
disability plan (or Social Security disability benefits at a time when the
Company does not maintain a long-term disability plan or such plan is not
available to you).
(d) Unless otherwise specified herein, all payments under
this Agreement shall be paid in a lump sum, less applicable withholding
taxes, within thirty (30) days following your termination.
3. COMPENSATION
(a) Each year during the Term hereof, you will be paid a base
salary of $225,000 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 70% of
your Base Salary and a maximum cash award in an amount equal to 140% of your
Base Salary, dependent upon certain financial or performance objectives,
determined in accordance with such program, and by the Board. To the extent
any incentive compensation in excess of the maximum cash amount referenced
above is payable under the Incentive Compensation Plan in any year to you,
the Company will pay you any such
<PAGE>
Mr. Robert D. Doty, Jr.
December 15, 1999
Page 4
amounts in noncash equivalents (e.g., stock options or restricted securities
of the Company) of equal value, as determined by the Board of Directors in
its sole and absolute discretion. At your election, in lieu of paying you
all or part of such incentive compensation bonus, the Company will allow you
to direct that all or part of such incentive compensation shall be allocated
by the Company to, or expended directly for, charitable contributions of your
selection.
(c) Upon the closing of the proposed merger of Dynegy and
Illinova Corporation pursuant to that certain merger agreement dated as of
June 14, 1999, as amended (the "Dynegy/Illinova merger"), you will receive
(x) a cash bonus of $25,000, (y) stock option grants pursuant to the Company's
Long-Term Incentive Plan ("LTIP") with a value equal to 100% of your Base
Salary and (z) 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 $200,000. Your EEOP options shall become 60%
vested and exercisable on the third anniversary of the Effective Date if you
are employed by the Company on such date. Each year during the Term of this
Agreement, you will be eligible to receive stock option grants in accordance
with requirements and provisions of the Company's LTIP. The current target
range for annual option grants for your position is a median of 100% and a
75th percentile of 160% 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 as of the date
of closing of the Dynegy/Illinova merger.
(e) You will be entitled to participate in Dynegy's benefits
programs for senior management executives, including, without limitation,
Dynegy's deferred compensation plan for executives. In addition, the Company
may provide other perquisites as approved by the Dynegy Board of Directors,
in its sole discretion. Pursuant to the terms of Dynegy's vacation policy
you will be entitled to four (4) weeks per year of paid vacation.
4. CONFIDENTIALITY/NONCOMPETE/NONSOLICITATION
You recognize and acknowledge that:
(a) You will have access to certain information concerning
the Company that is confidential and proprietary and constitutes valuable and
unique property of the Company. You agree that you will not at any time,
either during or after your employment, disclose to others, use, copy or
permit to be copied, except pursuant to your duties on behalf of the Company
or its successors, assigns or nominees, any secret or confidential
information of the Company (whether or not developed by you) without the
prior written consent of the Board of
<PAGE>
Mr. Robert D. Doty, Jr.
December 15, 1999
Page 5
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.
(c) To protect and safeguard the Company's trade secrets and
Confidential Information and also the Company's goodwill with its suppliers
and clients, for that period of time following the termination of your
employment for any reason other than pursuant to Paragraph 2(c) above (E.G.
in the event of a termination pursuant to the first paragraph of Paragraph
2(c), the non-compete obligations imposed by this Paragraph 4(c) terminate)
through the expiration of the Term or twenty-four (24) months from the date
of termination, whichever is earlier, you will not, within a 50 mile radius
of any location where the Company had an office at any time during the Term
hereof or any location where a client or supplier of the Company (which is a
material client or supplier at any time during the Term hereof) had an office
at any time during the Term hereof, without the prior written consent of the
Board of Directors of the Company, directly or indirectly, engage in or be
interested in (as owner, partner, shareholder, employee, director, agent,
consultant or otherwise), any business which is a competitor of the Company,
as hereinafter defined. For purposes of this Agreement, a "competitor of the
Company" is any entity, including without limitation a corporation, sole
proprietorship, partnership, joint venture, syndicate, trust or any other
form of organization or a parent, subsidiary or division of any of the
foregoing, which, during such period or the immediately preceding fiscal year
of such entity, was engaged in the unregulated marketing, gathering,
transportation or processing of natural gas or derivatives of natural gas or
other hydrocarbons or electricity. For purposes of this paragraph, the
following entities shall not be deemed to be competitors of the Company: (i)
a Local Distribution Company ("LDC") to the extent that any purchases or
sales by such LDC are only for consumption on its system; (ii) a natural gas
producer to the extent that such producer sells only its own production or
production of other working interest owners in wells in which it owns an
interest; (iii) a natural gas pipeline company in the jurisdictional aspects
of its business, i.e., other than a nonjurisdictional marketing affiliate or
production affiliate (except as to such production affiliates own production
<PAGE>
Mr. Robert D. Doty, Jr.
December 15, 1999
Page 6
as described in clause (ii) of this Paragraph 4(c)), or (iv) an integrated
regulated electric and/or gas utility as long as the utility does not engage
in the unregulated marketing of its generation or power trading other than
that related to the generation and power marketing allocated to its own
service territory. 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 was an
employee of the Company at the time of your termination, or any of its
subsidiaries or affiliated companies, to become employed by any person, firm
or corporation, and you shall not approach any such employee for such purpose
or authorize or knowingly approve the taking of such actions by any other
person, firm or corporation or assist any such person, firm or corporation in
taking such action.
(e) You agree that the foregoing restrictions contain
reasonable limitations as to the time, geographical area, and scope of
activity to be restrained and that these restrictions do not impose any
greater restraint than is necessary to protect the goodwill and other
legitimate business interests of the Company, including but not limited to
the protection of Confidential Information. You also agree that the general
public shall not be harmed by enforcement of this Paragraph 4. Should any
provision in this Paragraph 4 be held unreasonably broad with respect to the
restrictions as to time, geographical area, or scope of activity to be
restrained, any such restriction shall be construed by limiting and reducing
it to the extent necessary to render it reasonable, and as so construed, such
provision shall be enforced.
Accordingly, you consent and agree that if you violate any of
the provisions of this Paragraph 4, the Company and its subsidiaries and
affiliated companies would sustain irreparable harm and, therefore, in
addition to any other remedies which the Company may have under this
Agreement or otherwise, the Company shall be entitled to an injunction from
any court of competent jurisdiction restraining you from committing or
continuing any such violation of this Paragraph. You acknowledge that
damages at law would not be an adequate remedy for violation of this
Paragraph 4, and you therefore agree that the provisions of this Paragraph 4
may be specifically enforced against you in any court of competent
jurisdiction. Nothing herein shall be construed as prohibiting the Company
from pursuing any other remedies available to the Company for such breach or
threatened breach, including the recovery of damages from you.
5. INDEMNIFICATION
If, at any time during or after the Term of this Agreement,
you are made a party to, or are threatened to be made a party in, any civil,
criminal or administrative action, suit or proceeding by reason of the fact
that you are or were a director, officer, employee, or agent of the Company,
or of any other corporation or any partnership, joint venture, trust or other
enterprise for which you served as such at the request of the Company, then
you shall be
<PAGE>
Mr. Robert D. Doty, Jr.
December 15, 1999
Page 7
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, taxes and amounts paid
in satisfaction of a judgment or in settlement of any such action, suit or
proceeding, except amounts paid to the Company or such other corporation,
partnership, joint venture, trust or other enterprise by you. The foregoing
indemnification provisions shall be in addition to any other rights to
indemnification to which you may be entitled.
6. ARBITRATION
The parties hereto may attempt to resolve any dispute
hereunder informally via mediation or other means. Otherwise, any controversy
or claim arising out of or relating to this Agreement, or any breach thereof,
shall, except as provided in Paragraph 4, be adjusted only by arbitration in
accordance with the rules of the American Arbitration Association, and
judgment upon such award rendered by the arbitrator may be entered in any
court having jurisdiction thereof. The arbitration shall be held in the city
of Houston, Texas, or such other place as may be agreed upon at the time by
the parties to the arbitration. The arbitrator(s) shall, in their award,
allocate between the parties the costs of arbitration, which shall include
reasonable attorneys' fees of the parties, as well as the arbitrators' fees
and expenses, in such proportions as the arbitrator(s) deem just; PROVIDED
HOWEVER, notwithstanding the above, in the event you are the prevailing
party, then the Company agrees to reimburse you for all such costs of
arbitration, including, but not limited to attorneys' fees and expenses
reasonably incurred by you; PROVIDED FURTHER, notwithstanding the above, in
the event the Company is the prevailing party, then the total costs of
arbitration, including but not limited to attorneys' fees reasonably incurred
by the Company and arbitrators' fees and expenses that may be allocated to
you by the arbitrator(s) shall not in any event exceed Twenty-Five Thousand
Dollars ($25,000). Notwithstanding the foregoing, you shall be entitled to
seek specific performance in a court of competent jurisdiction of your right
to be paid your full compensation until your separation from employment,
during the pendency or dispute of any controversy arising under or in
connection with this Agreement.
7. OTHER PROVISIONS
(a) THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY
CONFLICTS OF LAW, RULE OR PRINCIPLE THAT MIGHT OTHERWISE REFER TO THE
SUBSTANTIVE LAW OF ANOTHER JURISDICTION.
<PAGE>
Mr. Robert D. Doty, Jr.
December 15, 1999
Page 8
(b) Except as otherwise indicated, this Agreement is not
assignable without the written authorization of both parties; provided that
the Company shall cause this Agreement to be assumed by any entity to which
the Company transfers substantially all of its stock or assets or to any
entity which is a successor to the Company by reorganization, incorporation,
merger or similar business combination.
(c) Except as otherwise provided herein, the provisions of
Paragraphs 4, 5 and 6 of this Agreement shall survive the termination of this
Agreement.
(d) All payments to you under this Agreement will be subject
to the withholding of all applicable employment taxes and income taxes;
provided, however, that at your request the parties hereto will use
reasonable efforts to explore alternatives to allow the Company to make
charitable contributions on behalf of the employee by redirecting a portion
of your annual bonuses to charitable organization(s) chosen by you in
accordance with Paragraph 3(b).
(e) This Agreement supersedes all previous employment
agreements, written or oral, between the Company and you. This Agreement may
be amended only by written amendment duly executed by both parties or their
legal representatives and authorized by action of the Board. Except as
otherwise specifically provided in this Agreement, no waiver by either party
hereto of any breach by the other party hereto of any condition or provision
of this Agreement to be performed by such other party shall be deemed a
waiver of a subsequent breach of such condition or provision or a waiver of a
similar or dissimilar provision or condition at the same or at any prior or
subsequent time.
(f) Any notice or other communication required or permitted
pursuant to the terms of this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
mail, first class, postage prepaid and registered with return receipt
requested, addressed to the intended recipient at his or its address set
forth below and, in the case of a notice or other communication to the
Company, directed to the attention of the Board of Directors with a copy to
the Secretary of the Company, or to such other address as the intended
recipient may have theretofore furnished to the sender in writing in
accordance herewith, except that until any notice of change of address is
received, notices shall be sent to the following addresses:
IF TO YOU: IF TO THE COMPANY:
Robert D. Doty Dynegy Inc.
#1 Pine Crescent Ct. 1000 Louisiana, Suite 5800
Houston, TX 77024 Houston, TX 77002
Attn: Executive Vice President and
Chief Financial 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
<PAGE>
Mr. Robert D. Doty, Jr.
December 15, 1999
Page 9
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, the same shall in no way affect any
other provision of this Agreement or the validity or enforceability of this
Agreement.
(l) The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(m) This Agreement may be executed in one or more
counterparts, which shall, collectively and separately, constitute one
agreement.
(n) Notwithstanding anything to the contrary set forth in
this Agreement, the Company may cause any of its subsidiaries for which you
render services to pay or otherwise satisfy, in whole or in part, some or all
of the Company's obligations hereunder.
If the foregoing reflects your understanding of the terms of
your employment with the Company, please execute each copy of this letter in
the space provided below.
DYNEGY INC.
By:
Name: John Clarke
Title: Executive Vice President and
Chief Financial Officer
<PAGE>
Mr. Robert D. Doty, Jr.
December 15, 1999
Page 10
AGREED AND ACCEPTED this
____ day of December, 1999
___________________________
Robert D. Doty, Jr.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.11
<SEQUENCE>3
<FILENAME>a2041096zex-10_11.txt
<DESCRIPTION>EXHIBIT 10.11
<TEXT>
<PAGE>
December 15, 1999
Mr. R. Blake Young
5301 Jessamine
Bellaire, TX 77401
Dear Blake:
Set forth below are the terms of your employment (the "Agreement")
with Dynegy Inc. (hereinafter referred to collectively as "Dynegy" or the
"Company").
1. TITLE AND DUTIES
Your title shall be Senior Vice President and Chief
Information Officer, Dynegy Inc. You shall have such duties as may be
delegated from time to time by your immediate supervisor. You will be
employed at Dynegy's headquarters in Houston, Texas. You shall devote your
full time, energy and skill to the performance of your duties for Dynegy, and
will exercise due diligence and reasonable care in the performance of such
duties.
2. TERM
(a) Unless earlier terminated as provided for herein, the
term of this Agreement will be for three (3) years, beginning 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 sixty (60) days prior to the date on which this Agreement
would otherwise be automatically extended that such party is electing not to
so extend the Term. The term "Effective Date" means the date of closing of
the proposed merger of Dynegy Inc. and Illinova Corporation pursuant to that
certain merger agreement dated as of June 14, 1999, as amended.
(b) If your employment with Dynegy is terminated due to your
voluntary resignation or by the Company for "cause", this Agreement shall
terminate immediately (except for the confidentiality, non-competition and
non-solicitation provisions of Paragraph 4 and the provisions of Paragraphs 5
and 6), and the Company shall have no further obligation to you except for
the payment of amounts due before the date of such termination. You further
agree that the benefits which you have received from the execution of this
Agreement through the date of such termination constitute sufficient
consideration for your obligations pursuant to Paragraph 4, notwithstanding
the fact that the Company has no further obligation to you except for the
payment of amounts due before the date of such termination.
<PAGE>
Mr. R. Blake Young
December 15, 1999
Page 2
For purposes of this Agreement, you may be terminated for
"cause" as a result of (i) your refusal to implement or adhere to lawful
policies or lawful directives of the Board of Directors of Dynegy (the "Board
of Directors") or your immediate supervisor; (ii) serious misconduct,
dishonesty or disloyalty, directly related to the performance of duties for
the Company or gross negligence in the performance of your duties for the
Company; (iii) your being convicted (or entering into a plea bargain
admitting or not contesting criminal guilt) in any felony criminal
proceeding; (iv) drug or alcohol abuse; (v) continued failure to perform your
duties under this Agreement which is not cured within 10 days after written
notice of such failure is provided to you by Dynegy; or (vi) any other
material breach of this Agreement by you that is not cured within ten (10)
days after written notice of such breach is delivered to you from the Company.
(c) If your employment is terminated during the Term of this
Agreement due to resignation following "constructive termination" (as defined
below) or for any other reason other than your voluntary resignation, death,
disability, or discharge for cause, you shall receive as your sole
compensation in lieu of further payments to you pursuant to Paragraph3 hereof
(i) a lump sum amount equal to the product of (x) 2.99 and (y) the greater of
(a) the average annual Base Salary and incentive compensation, whether payable
in cash or stock options, you were paid by the Company for the highest three
(3) calendar years preceding the calendar year in which your employment is
terminated (or such shorter period as you have actually been employed by the
Company), or (b) your Base Salary and target bonus amount for the year in
which your employment is terminated; (ii) a lump sum amount equal to the
present value, as determined by the Board of Directors in its sole and
absolute discretion, of the benefits to be provided to you in Paragraph 3(e)
of this Agreement and such other perquisites (if any) being provided to you
on the date of your termination, as if you were still employed for the
remainder of the Term of this Agreement, with regard to those benefits to be
provided to you during the Term of this Agreement, and as if you had
completed the Term of this Agreement with regard to those benefits to be
provided to you upon completion of the Term of this Agreement; (iii) any
employee stock options granted to you prior to or during the Term of this
Agreement shall become vested as of the date of resignation due to such
constructive termination or discharge not for cause, and you shall have the
right to exercise any such vested options through the end of the Term of this
Agreement or one year from the date of termination, whichever is later; and
(iv) for a period of thirty-six (36) months from the date of resignation due
to such constructive discharge or discharge due not for cause, all health and
welfare benefits the Company was maintaining for you and your family as of
the date of such resignation or discharge.
For purposes of this Agreement a "constructive termination"
shall be deemed to have occurred in the event that (i) your Base Salary as
defined in Paragraph 3(a), bonus compensation under Paragraph 3(b), target
range of annual option grants under Paragraph 3(c) or other compensation as
described in Paragraph 3(e) is reduced; (ii) a significant diminution in your
responsibilities, authority or scope of duties is effected, and such
diminution is made without your written consent (without regard to whether or
not any change is made to your title); (iii) the Company materially breaches
this Agreement, or (iv) the relocation of the Company's principal executive
offices to a location, or the Company requires you to be based, outside a
fifty (50) mile radius from the city limits of Houston, Texas. Any
resignation by you as a result of
<PAGE>
Mr. R. Blake Young
December 15, 1999
Page 3
assertion of a constructive termination shall be communicated by delivery to
the Board of Directors of the Company within thirty (30) days from the
commencement of such constructive termination by written notice setting forth
the grounds therefor, during which period the Company shall be entitled to
cure or remedy the matters set forth in such notice to your reasonable
satisfaction.
Unless you withdraw such notice prior to the expiration of such
thirty (30) day period, such resignation shall take effect upon the
expiration of thirty days from the date of the delivery of such notice. Any
other resignation by you shall be communicated by thirty days' advance
written notice.
If you die, or become disabled and cannot perform your duties, your
employment hereunder shall be terminated and: (i) you (or your estate) shall
be entitled to the Base Salary (as defined in Paragraph 3(a)) payable to you
hereunder for twelve (12) months following the month in which you die or
become disabled, plus the amount of any target bonus as described in
Paragraph 3(b) for the year of death or disability, prorated for the period
of twelve (12) months following the date of death or disability; (ii) you (or
your estate) shall receive, for a period of twenty-four (24) months from the
date of your death or disability, all health insurance and health benefits
that the Company was maintaining for you and/or your estate and for your
family as of the date of your death or disability; and (iii) any employee
stock options granted to you during the Term of this Agreement shall become
vested as of the date of your death or disability. For purposes of this
Agreement, you shall be disabled as of the first date on which you become
eligible to receive disability benefits under the Company's long-term
disability plan (or Social Security disability benefits at a time when the
Company does not maintain a long-term disability plan or such plan is not
available to you).
(d) Unless otherwise specified herein, all payments under
this Agreement shall be paid in a lump sum, less applicable withholding
taxes, within thirty (30) days following your termination.
3. COMPENSATION
(a) Each year during the Term hereof, you will be paid a base
salary of $250,000 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 70% of
your Base Salary and a maximum cash award in an amount equal to 140% of your
Base Salary, dependent upon certain financial or performance objectives,
determined in accordance with such program, and by the Board. To the extent
any incentive compensation in excess of the maximum cash amount referenced
above is payable under the Incentive Compensation Plan in any year to you,
the Company will pay you any such
<PAGE>
Mr. R. Blake Young
December 15, 1999
Page 4
amounts in noncash equivalents (e.g., stock options or restricted securities
of the Company) of equal value, as determined by the Board of Directors in
its sole and absolute discretion. At your election, in lieu of paying you
all or part of such incentive compensation bonus, the Company will allow you
to direct that all or part of such incentive compensation shall be allocated
by the Company to, or expended directly for, charitable contributions of your
selection.
(c) Upon the closing of the proposed merger of Dynegy and
Illinova Corporation pursuant to that certain merger agreement dated as of
June 14, 1999, as amended (the "Dynegy/Illinova merger"), you will receive
(x) a cash bonus of $55,000, (y) stock option grants pursuant to the Company's
Long-Term Incentive Plan ("LTIP") with a value equal to 100% of your Base
Salary and (z) discounted stock option grants under the Employee Equity Option
Plan ("EEOP"; and, together with LTIP, the "Stock Option Plans") with an
in-the-money value equal to $500,000. Your EEOP options shall become 60%
vested and exercisable on the third anniversary of the Effective Date. Each
year during the Term of this Agreement, you will be eligible to receive stock
option grants in accordance with requirements and provisions of the Company's
LTIP. The current target range for annual option grants for your position is
a median of 100% and a 75th percentile of 160% 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 as of the date
of closing of the Dynegy/Illinova merger.
(e) You will be entitled to participate in Dynegy's benefits
programs for senior management executives, including, without limitation,
Dynegy's deferred compensation plan for executives. In addition, the Company
may provide other perquisites as approved by the Dynegy Board of Directors in
its sole discretion. Pursuant to the terms of Dynegy's vacation policy you
will be entitled to four (4) weeks per year of paid vacation.
4. CONFIDENTIALITY/NONCOMPETE/NONSOLICITATION
You recognize and acknowledge that:
(a) You will have access to certain information concerning
the Company that is confidential and proprietary and constitutes valuable and
unique property of the Company. You agree that you will not at any time,
either during or after your employment, disclose to others, use, copy or
permit to be copied, except pursuant to your duties on behalf of the Company
or its successors, assigns or nominees, any secret or confidential
information of the Company (whether or not developed by you) without the
prior written consent of the Board of Directors of the Company. The term
"secret or confidential information of the Company"
<PAGE>
Mr. R. Blake Young
December 15, 1999
Page 5
(sometimes referred to herein as "Confidential Information") shall include,
without limitation, the Company's plans, strategies, potential acquisitions,
costs, prices, systems for buying, selling, and/or trading natural gas,
natural gas liquids, crude oil, coal, and electricity, client lists, pricing
policies, financial information, the names of and pertinent information
regarding suppliers, computer programs, policy or procedure manuals, training
and recruiting procedures, accounting procedures, the status and content of
the Company's contracts with its suppliers or clients, or servicing methods
and techniques at any time used, developed, or investigated by the Company,
before or during your tenure of employment to the extent any of the foregoing
are (i) not generally available to the public and (ii) maintained as
confidential by the Company. You further agree to maintain in confidence any
confidential information of third parties received as a result of your
employment and duties with the Company.
(b) At the termination of your employment you will deliver to
the Company, as determined appropriate by the Company, all correspondence,
memoranda, notes, records, client lists, computer systems, programs, or other
documents and all copies thereof made, composed or received by you, solely or
jointly with others, and which are in your possession, custody, or control at
such date and which are related in any manner to the past, present, or
anticipated business of the Company.
(c) To protect and safeguard the Company's trade secrets and
Confidential Information and also the Company's goodwill with its suppliers
and clients, for that period of time following the termination of your
employment for any reason other than pursuant to Paragraph 2(c) above (E.G.
in the event of a termination pursuant to the first paragraph of Paragraph
2(c), the non-compete obligations imposed by this Paragraph 4(c) terminate)
through the expiration of the Term or twenty-four (24) months from the date
of termination, whichever is earlier, you will not, within a 50 mile radius
of any location where the Company had an office at any time during the Term
hereof or any location where a client or supplier of the Company (which is a
material client or supplier at any time during the Term hereof) had an office
at any time during the Term hereof, without the prior written consent of the
Board of Directors of the Company, directly or indirectly, engage in or be
interested in (as owner, partner, shareholder, employee, director, agent,
consultant or otherwise), any business which is a competitor of the Company,
as hereinafter defined. For purposes of this Agreement, a "competitor of the
Company" is any entity, including without limitation a corporation, sole
proprietorship, partnership, joint venture, syndicate, trust or any other
form of organization or a parent, subsidiary or division of any of the
foregoing, which, during such period or the immediately preceding fiscal year
of such entity, was engaged in the unregulated marketing, gathering,
transportation or processing of natural gas or derivatives of natural gas or
other hydrocarbons or electricity. For purposes of this paragraph, the
following entities shall not be deemed to be competitors of the Company: (i)
a Local Distribution Company ("LDC") to the extent that any purchases or
sales by such LDC are only for consumption on its system; (ii) a natural gas
producer to the extent that such producer sells only its own production or
production of other working interest owners in wells in which it owns an
interest; (iii) a natural gas pipeline company in the jurisdictional aspects
of its business, i.e., other than a nonjurisdictional marketing affiliate or
production affiliate (except as to such production affiliates own production
as described in clause (ii) of this Paragraph 4(c)), or (iv) an integrated
regulated electric and/or
<PAGE>
Mr. R. Blake Young
December 15, 1999
Page 6
gas utility, as long as the utility does not engage in the unregulated
marketing of its generation or power trading other than that related to the
generation and power marketing allocated to its own service areas. The terms
of this Paragraph 4(c) shall not apply to your present or future investments
in the securities of companies listed on a national securities exchange or
traded on the over-the-counter market to the extent such investments do not
exceed one percent (1%) of the total outstanding shares of such company.
(d) For a period of twenty-four (24) months after the
expiration or termination of your employment for whatever reason other than
pursuant to Paragraph 2(c) above or for a period of twelve months following
the termination of your employment pursuant to Paragraph 2(c) above, you
shall not solicit, raid, entice, encourage or induce any person who was an
employee of the Company at the time of your termination, or any of its
subsidiaries or affiliated companies, to become employed by any person, firm
or corporation, and you shall not approach any such employee for such purpose
or authorize or knowingly approve the taking of such actions by any other
person, firm or corporation or assist any such person, firm or corporation in
taking such action.
(e) You agree that the foregoing restrictions contain
reasonable limitations as to the time, geographical area, and scope of
activity to be restrained and that these restrictions do not impose any
greater restraint than is necessary to protect the goodwill and other
legitimate business interests of the Company, including but not limited to
the protection of Confidential Information. You also agree that the general
public shall not be harmed by enforcement of this Paragraph 4. Should any
provision in this Paragraph 4 be held unreasonably broad with respect to the
restrictions as to time, geographical area, or scope of activity to be
restrained, any such restriction shall be construed by limiting and reducing
it to the extent necessary to render it reasonable, and as so construed, such
provision shall be enforced.
Accordingly, you consent and agree that if you violate any of
the provisions of this Paragraph 4, the Company and its subsidiaries and
affiliated companies would sustain irreparable harm and, therefore, in
addition to any other remedies which the Company may have under this
Agreement or otherwise, the Company shall be entitled to an injunction from
any court of competent jurisdiction restraining you from committing or
continuing any such violation of this Paragraph. You acknowledge that
damages at law would not be an adequate remedy for violation of this
Paragraph 4, and you therefore agree that the provisions of this Paragraph 4
may be specifically enforced against you in any court of competent
jurisdiction. Nothing herein shall be construed as prohibiting the Company
from pursuing any other remedies available to the Company for such breach or
threatened breach, including the recovery of damages from you.
5. INDEMNIFICATION
If, at any time during or after the Term of this Agreement,
you are made a party to, or are threatened to be made a party in, any civil,
criminal or administrative action, suit or proceeding by reason of the fact
that you are or were a director, officer, employee, or agent of the Company,
or of any other corporation or any partnership, joint venture, trust or other
enterprise for which you served as such at the request of the Company, then
you shall be indemnified by the Company, to the fullest extent permitted
under applicable law, against
<PAGE>
Mr. R. Blake Young
December 15, 1999
Page 7
expenses actually and reasonably incurred by you or imposed on you in
connection with, or resulting from, the defense of such action, suit or
proceeding, or in connection with, or resulting from, any appeal therein if
you acted in good faith and in a manner you reasonably believed to be in or
not opposed to the best interest of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe your
conduct was unlawful, except with respect to matters as to which it is
adjudged that you are liable to the Company or to such other corporation,
partnership, joint venture, trust or other enterprise for gross negligence or
willful misconduct in the performance of your duties. As used herein, the
term "expenses" shall include all obligations actually and reasonably
incurred by you for the payment of money, including, without limitation,
attorney's fees, judgments, awards, fines, penalties, taxes and amounts paid
in satisfaction of a judgment or in settlement of any such action, suit or
proceeding, except amounts paid to the Company or such other corporation,
partnership, joint venture, trust or other enterprise by you. The foregoing
indemnification provisions shall be in addition to any other rights to
indemnification to which you may be entitled.
6. ARBITRATION
The parties hereto may attempt to resolve any dispute
hereunder informally via mediation or other means. Otherwise, any controversy
or claim arising out of or relating to this Agreement, or any breach thereof,
shall, except as provided in Paragraph 4, be adjusted only by arbitration in
accordance with the rules of the American Arbitration Association, and
judgment upon such award rendered by the arbitrator may be entered in any
court having jurisdiction thereof. The arbitration shall be held in the city
of Houston, Texas, or such other place as may be agreed upon at the time by
the parties to the arbitration. The arbitrator(s) shall, in their award,
allocate between the parties the costs of arbitration, which shall include
reasonable attorneys' fees of the parties, as well as the arbitrators' fees
and expenses, in such proportions as the arbitrator(s) deem just; PROVIDED
HOWEVER, notwithstanding the above, in the event you are the prevailing
party, then the Company agrees to reimburse you for all such costs of
arbitration, including, but not limited to attorneys' fees and expenses
reasonably incurred by you; PROVIDED FURTHER, notwithstanding the above, in
the event the Company is the prevailing party, then the total costs of
arbitration, including but not limited to attorneys' fees reasonably incurred
by the Company and arbitrators' fees and expenses that may be allocated to
you by the arbitrator(s) shall not in any event exceed Twenty-Five Thousand
Dollars ($25,000). Notwithstanding the foregoing, you shall be entitled to
seek specific performance in a court of competent jurisdiction of your right
to be paid your full compensation until your separation from employment,
during the pendency or dispute of any controversy arising under or in
connection with this Agreement.
7. OTHER PROVISIONS
(a) THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY
CONFLICTS OF LAW, RULE OR PRINCIPLE THAT MIGHT OTHERWISE REFER TO THE
SUBSTANTIVE LAW OF ANOTHER JURISDICTION.
(b) Except as otherwise indicated, this Agreement is not
assignable without the written authorization of both parties; provided that
the Company shall cause this Agreement
<PAGE>
Mr. R. Blake Young
December 15, 1999
Page 8
to be assumed by any entity to which the Company transfers substantially all
of its stock or assets or to any entity which is a successor to the Company
by reorganization, incorporation, merger or similar business combination.
(c) Except as otherwise provided herein, the provisions of
Paragraphs 4, 5 and 6 of this Agreement shall survive the termination of this
Agreement.
(d) All payments to you under this Agreement will be subject
to the withholding of all applicable employment taxes and income taxes;
provided, however, that at your request the parties hereto will use
reasonable efforts to explore alternatives to allow the Company to make
charitable contributions on behalf of the employee by redirecting a portion
of your annual bonuses to charitable organization(s) chosen by you in
accordance with Paragraph 3(b).
(e) This Agreement supersedes all previous employment
agreements, written or oral, between the Company and you. This Agreement may
be amended only by written amendment duly executed by both parties or their
legal representatives and authorized by action of the Board. Except as
otherwise specifically provided in this Agreement, no waiver by either party
hereto of any breach by the other party hereto of any condition or provision
of this Agreement to be performed by such other party shall be deemed a
waiver of a subsequent breach of such condition or provision or a waiver of a
similar or dissimilar provision or condition at the same or at any prior or
subsequent time.
(f) Any notice or other communication required or permitted
pursuant to the terms of this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
mail, first class, postage prepaid and registered with return receipt
requested, addressed to the intended recipient at his or its address set
forth below and, in the case of a notice or other communication to the
Company, directed to the attention of the Board of Directors with a copy to
the Secretary of the Company, or to such other address as the intended
recipient may have theretofore furnished to the sender in writing in
accordance herewith, except that until any notice of change of address is
received, notices shall be sent to the following addresses:
IF TO YOU: IF TO THE COMPANY:
R. Blake Young Dynegy Inc.
5301 Jessamine 1000 Louisiana, Suite 5800
Bellaire, TX 77401 Houston, TX 77002
Attn: Executive Vice President and
Chief Financial 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
<PAGE>
Mr. R. Blake Young
December 15, 1999
Page 9
provisions or part thereof shall be reformed so that it would be valid, legal
and enforceable to the maximum extent permitted by law.
(h) Neither you nor the Company will make or authorize any
public statement disparaging the other in its or his business interests and
affairs. Notwithstanding the foregoing, neither party shall be (i) required
to make any statement which it or he believes to be false or inaccurate, or
(ii) restricted in connection with any litigation, arbitration or similar
proceeding or with respect to its response to any legal process. The
provisions in this Paragraph 7(h) shall survive the termination of your
employment hereunder, irrespective of the reason therefor.
(i) The waiver by the Company of breach of any provision of
this Agreement by you shall not operate or be construed as a waiver of any
subsequent breach by you. The waiver by you of a breach of any provision of
this Agreement by the Company shall not operate or be construed as a waiver
of any subsequent breach by the Company.
(j) You shall not be required to mitigate damages (or the
amount of any compensation provided under this Agreement to be paid)
following your termination of employment, by seeking employment or otherwise.
(k) If any provision of this Agreement as applied to either
party or to any circumstances shall be adjudged by a court of competent
jurisdiction to be void or unenforceable, the same shall in no way affect any
other provision of this Agreement or the validity or enforceability of this
Agreement.
(l) The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(m) This Agreement may be executed in one or more
counterparts, which shall, collectively and separately, constitute one
agreement.
(n) Notwithstanding anything to the contrary set forth in
this Agreement, the Company may cause any of its subsidiaries for which you
render services to pay or otherwise satisfy, in whole or in part, some or all
of the Company's obligations hereunder.
If the foregoing reflects your understanding of the terms of
your employment with the Company, please execute each copy of this letter in
the space provided below.
DYNEGY INC.
By:
___________________________
Name: John U. Clarke
Title: Executive Vice President and
Chief Financial Officer
<PAGE>
Mr. R. Blake Young
December 15, 1999
Page 10
AGREED AND ACCEPTED this
____ day of December, 1999
___________________________
R. Blake Young
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>4
<FILENAME>a2041096zex-21_1.txt
<DESCRIPTION>EXHIBIT 21.1
<TEXT>
<PAGE>
Exhibit 21.1
Subsidiaries of Dynegy Inc.
As of December 31, 2000
<TABLE>
<CAPTION>
Subsidiary State or Jurisdiction of Incorporation
- ---------- --------------------------------------
<S> <C> <C>
1. Dynegy Holdings Inc. Delaware
2. Illinova Corporation Illinois
3. Dynegy Global Communications, Inc. Delaware
4. Dynegy Power Corp. Delaware
5. Dynegy Global Energy, Inc. Delaware
6. DMT Holdings, Inc. Delaware
7. Dynegy GP, Inc. Delaware
8. Dynegy Midstream Services, L.P. Delaware
9. Dynegy Midwest Generation, Inc. Illinois
10. Dynegy Upper Holdings, L.L.C. Delaware
11. Dynegy Administrative Services Company Delaware
12. Illinois Power Company Illinois
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>5
<FILENAME>a2041096zex-23_1.txt
<DESCRIPTION>EXHIBIT 23.1
<TEXT>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statements on Forms S-8 -- File Nos. 333-96045, 333-96047 and
333-47422 and Forms S-3 -- File Nos. 333-32036, 333-46634 and 333-47532.
ARTHUR ANDERSEN LLP
Houston, Texas
March 6, 2001
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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