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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _____________
COMMISSION FILE NUMBER: 1-11156
DYNEGY INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3248415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Louisiana, Suite 5800
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 507-6400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class: on which registered:
Common Stock, par value $.01 per share New York Stock Exchange
Series A Participating Preferred Stock --
6.75% Debt Securities due 2005 --
7.125% Debentures due 2018 --
7.625% Senior Notes due 2026 --
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes [X] No [_]
The aggregate value of Common Stock held by non-affiliates of the registrant was
approximately $434,709,735 on March 24, 1999, (based on $15.00 per share, the
last sale price of the Common Stock as reported on the New York Stock Exchange
Composite Tape on such date). 152,599,134 shares of the registrant's Common
Stock were outstanding as of March 24, 1999.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of Parts I, II and IV in the
Annual Report to Shareholders for the fiscal year ended December 31, 1998. As
to Part III (items 10, 11, 12 and 13), Notice and Proxy Statement for the 1999
Annual Meeting of Stockholders to be filed not later than 120 days after
December 31, 1998.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
DYNEGY INC.
FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business........................................... 1
Item 1A. Executive Officers................................. 13
Item 2. Properties......................................... 15
Item 3. Legal Proceedings.................................. 20
Item 4. Submission of Matters to a Vote of Security Holders 22
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters........................ 22
Item 6. Selected Financial Data............................. 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 24
Item 8. Financial Statements and Supplementary Data......... 39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 39
PART III
Item 10. Directors and Executive Officers of the Registrant. 39
Item 11. Executive Compensation............................. 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................ 39
Item 13. Certain Relationships and Related Transactions..... 39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................ 39
Signatures........................................................ 46
For definitions of certain terms used herein,
see "Item 1. BUSINESS -- DEFINITIONS."
PART I
Item 1. BUSINESS
THE COMPANY
General
Dynegy Inc. ("Dynegy" or the "Company") is a leading provider of energy
products and services in North America and the United Kingdom. Products marketed
by the Company's wholesale marketing operations include natural gas,
electricity, coal, natural gas liquids, crude oil, liquid petroleum gas and
related services. The Company's wholesale marketing operations are supported by
ownership or control of an extensive asset base and transportation network that
includes unregulated power generation, gas and liquids storage capacity, gas,
power and liquids transportation capacity and gas gathering, processing and
fractionation assets. The critical mass achieved through the combination of a
large scale energy marketing operation with strategically located assets which
augment the marketing efforts affords the Company the ability to offer
innovative, value-creating energy solutions to its customers.
The Company is a holding company that conducts substantially all of its
business through its subsidiaries. From inception of operations in 1984 until
1990, Natural Gas Clearinghouse ("Clearinghouse") limited its activities
primarily to natural gas marketing. Starting in 1990, Clearinghouse began
expanding its core business operations through acquisitions and strategic
alliances resulting in the formation of a mid-stream energy asset business and
establishing energy marketing operations in both Canada and the United Kingdom.
The Company initiated electric power marketing operations in February 1994 in
order to exploit opportunities created by the deregulation of the domestic
electric power industry. Effective March 1, 1995, Clearinghouse and Trident NGL
Holding, Inc. ("Holding"), a fully integrated natural gas liquids company,
merged ("Trident Combination") and the combined entity was renamed NGC
Corporation ("NGC"). On August 31, 1996, NGC completed a strategic combination
with Chevron U.S.A. Inc. and certain Chevron affiliates (collectively "Chevron")
whereby substantially all of Chevron's mid-stream assets merged with NGC
("Chevron Combination"). BG plc, Chevron and NOVA Chemicals Corp. ("NOVA") each
own approximately 26 percent of the outstanding common stock of Dynegy.
Effective July 1, 1997, NGC acquired Destec Energy, Inc. ("Destec Acquisition"),
a leading independent power producer. During 1998, the Company changed its name
to Dynegy Inc. in order to reflect its evolution from a natural gas marketing
company to an energy services company capable of meeting the growing demands and
diverse challenges of the dynamic energy market of the 21st Century.
The principal executive office of the Company is located at 1000 Louisiana,
Suite 5800, Houston, Texas 77002, and the telephone number of that office is
(713) 507-6400. Dynegy and its affiliates maintain marketing and/or regional
offices in Atlanta, Georgia; Boston, Massachusetts; Calgary, Alberta; Chicago,
Illinois; Dallas, Texas; Englewood, Colorado; London, England; Midland, Texas;
Oklahoma City, Oklahoma; Pleasanton, California; Tampa, Florida; Tulsa,
Oklahoma; and Washington D.C.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION
This Form 10-K contains various forward-looking statements, within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, and information that are based on management's beliefs as
well as assumptions made by and information currently available to management.
When used in this document, words such as "anticipate", "estimate", "project",
and "expect" reflect forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable; it can give no assurance that such expectations will prove to have
been correct. Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, projected or expected. Among the
key risk factors that may have a direct bearing on Dynegy's results of
operations and financial condition are:
. Competitive practices in the industries in which Dynegy competes;
. Fluctuations in commodity prices for natural gas, electricity, natural gas
liquids, crude oil or coal;
. Fluctuations in energy commodity prices which could not or have not been
properly hedged or which are inconsistent with Dynegy's open position in its
energy marketing activities;
. Operational and systems risks;
. Environmental liabilities which are not covered by indemnity or insurance;
. Software, hardware or third-party failures resulting from Year 2000 issues;
1
. General economic and capital market conditions, including fluctuations in
interest rates; and
. The impact of current and future laws and governmental regulations
(particularly environmental regulations) affecting the energy industry in
general, and Dynegy's operations in particular.
DEFINITIONS
As used in this Form 10-K, the abbreviations listed below are defined as
follows:
Bbl 42 U.S. gallons, the basic unit for measuring crude oil and
natural gas condensate.
MBbls/d Volume of one thousand barrels per day.
MMBbls Volume of one million barrels.
MMcf/d Volume of one million cubic feet per day.
Bcf Volume of one billion cubic feet.
Bcf/d Volume of one billion cubic feet per day.
Btu British Thermal Unit - a measure of the amount of heat required
to raise the temperature of one pound of water one degree Fahrenheit.
Bpd Barrels per day.
NGLs Natural gas liquids.
LPG Liquid petroleum gas.
MW Megawatts.
Spot The Henry Hub cash price posting for natural gas per the "Inside FERC"
publication.
BUSINESS
The Company reports operations under two primary business segments: the
Wholesale Gas and Power and Liquids segments. A general description of the
business strategy employed by each segment is followed by a discussion of each
segment's component businesses.
WHOLESALE GAS AND POWER SEGMENT
This segment is actively engaged in value creation through marketing and
trading of natural gas, power and coal and the generation of electricity
principally under the name Dynegy Marketing and Trade. Dynegy is pursuing an
integrated wholesale energy business approach based on execution of an energy
convergence strategy. This strategy exploits the marketing, trading and
arbitrage opportunities existing in the natural gas and power markets that are
enhanced by the control and optimization of related physical assets. The
combination of a portfolio of strategic generation assets and a national gas and
power marketing franchise allow for extraction of value resulting from arbitrage
opportunities occurring across energy products, across geographic regions and
over time. The Company refers to this synergistic relationship between merchant
generation capacity and energy trading and marketing as the "Merchant Leverage
Effect" depicted below.
DYNEGY'S MERCHANT LEVERAGE EFFECT
GENERATION TRADING & MARKETING
Capacity & Energy National Market Access
Expanded Product Portfolio Market Infrastructure & Intelligence
Supply Reliability Risk Management & Arbitrage
Development Expertise Fuel and Asset Management
Operations Expertise Transmission Expertise & Position
MARKET SHARE INCREASED RETURNS
2
Dynegy views its gas and power marketing and power generation businesses as
an integrated unit. Ownership or control of merchant generation, or "Btu
Conversion" capacity, when coupled with the Company's national wholesale gas and
power marketing franchise, creates a wide range of value creation opportunities
benefiting both the Company and its customers. Dynegy's wholesale trading and
marketing franchise adds value to its generation assets by providing national
market access, market infrastructure and intelligence, risk management and
arbitrage opportunities, fuel management and procurement expertise and
transmission expertise for inputs (gas) and outputs (power). Generation capacity
adds value to the Company's wholesale trading and marketing franchise by
providing an outlet/market for gas supply, a source of reliable power supply and
an enhanced ability to structure innovative new products and services for
customers.
Concurrent with the restructuring of the U.S. wholesale electricity
markets, Dynegy is continuing its focus on building a portfolio of merchant
generation capacity in select markets across the country. Dynegy believes that
merchant generation capacity, which is designed principally to supply power to
markets during periods of peak demand, offers the greatest flexibility in
executing its strategy of an integrated gas and power marketing and power
generation business. For the foreseeable future, Dynegy will continue to expand
its ownership or commercial control over strategic generation assets/capacity in
selected markets through acquisitions, greenfield development and asset
management agreements. It is expected that approximately seventy percent of
projected capital expenditures over the next three years will be directed to the
control or ownership of generation assets designed to maximize value extraction
through execution of the Merchant Leverage Effect.
Deregulation of the retail gas and power markets is also evolving to
encourage greater competition and access to markets. Dynegy's retail gas and
electric strategy is designed to access a significant national customer base
while mitigating the large capital investment and financial risks necessitated
by other national retail marketing strategies. Rather than competing directly
with its existing wholesale customers, Dynegy has chosen to strengthen key
customer relationships by forming a number of regional retail gas alliances. The
combination of Dynegy's low cost energy supply (gas and power) with a regional
utility's large, installed customer base and local name recognition positions
each alliance to capture a significant portion of the local gas and power
market, when those markets fully open to competition. Dynegy's goal is to form
a North American network of regional retail energy alliances. Dynegy believes
that this strategy will accelerate its penetration of the retail gas and
electric markets while significantly reducing financial risk during this period
of regulatory uncertainty and restructuring. The following chart provides
geographic data on existing and targeted alliance markets.
DYNEGY'S RETAIL ALLIANCE NETWORK
[Map appears here]
Dynegy's integrated vision of the gas and power marketing and power
generation businesses in the United States is expected to be replicated
throughout Canada, the United Kingdom, Europe and Australia as those markets
open up to greater competition, subject to any unique attributes associated with
market deregulation in those areas. The Company maintains established energy
trading operations in both Canada and in the UK and is continuing to assess
local, regional and national markets, regulatory environments and other factors
in order to support and direct future economic investment.
3
Liquids Segment
This segment principally operates under the name Dynegy Mid-Stream Services
and consists of the North American mid-stream liquids operations, as well as the
global liquefied petroleum gas transportation and natural gas liquids marketing
operations located in Houston and London, and certain other businesses. The
North American mid-stream liquids operations are actively engaged in the
gathering and processing of natural gas and the transportation, fractionation
and storage of NGLs. Dynegy believes that a strategic shift in the historical
mid-stream asset business paradigm is occurring as major producers upstream and
refiners downstream have divested their ownership in these assets and
operations. Traditionally, these operations provided intermediate service and
support functions within most integrated petroleum companies. Dynegy believes
that it can achieve significant costs and operating efficiencies as well as
attractive returns on services provided to the market from the independent
ownership and operation of these assets. Dynegy believes that value creation
occurs throughout the mid-stream service businesses. As a result, Dynegy has
built a vertically integrated natural gas liquids infrastructure having the
capability of extracting profit throughout the value chain extending from inlet
natural gas volumes gathered from producing horizons throughout the US and
Canada to marketing NGLs to wholesalers and end-users throughout the world.
DYNEGY'S "LIQUIDS VALUE CHAIN"
[Graphic appears here]
The Company is a recognized industry leader in substantially all mid-stream
component businesses, ranging from natural gas processing to marketing NGLs to
end users. Dynegy is the second largest processor of natural gas in the United
States; it owns substantial fractionation capacity that exceeds three hundred
thousand barrels per day and the Company markets over four hundred fifty
thousand barrels of NGLs daily. These activities are supported by an extensive
storage and transportation system, which includes in excess of 14,000 miles of
natural gas pipelines, 2,000 miles of crude oil pipelines, 500 miles of NGL
pipelines and 60 million barrels of NGL storage capacity. To further assist its
operations, the Company has access to substantial barge, rail, trucking and
terminalling assets as well as large-hull ships having long-haul capabilities,
which enhance international trading opportunities.
Despite significant consolidation over the last four years, the domestic
mid-stream industry remains relatively fragmented and competition for additional
inlet volumes remains intense. The recent downturn in NGL prices has put
additional pressure on operating margins. Dynegy has responded to these industry
conditions by aggressively reducing costs, rationalizing assets in non-core
areas and improving its competitive position in core operating areas through
asset consolidation and alliances with industry partners. The goal of these
efforts is to mitigate the variability of earnings and cash flow caused by
fluctuations in commodity prices.
4
OVERVIEW OF SEGMENT BUSINESSES
WHOLESALE GAS AND POWER SEGMENT - NATURAL GAS
The Company's wholesale natural gas marketing activities are conducted
throughout North America and in the United Kingdom. These activities consist of
contracting to purchase specific volumes of natural gas from suppliers at
various points of receipt to be supplied over a specific period of time;
aggregating natural gas supplies and arranging for the transportation of these
gas supplies through proprietary and third-party transmission systems;
negotiating the sale of specific volumes of natural gas over a specific period
of time to local distribution companies (LDCs), utilities, power plants and
other end-users; and matching natural gas receipts and deliveries based on
volumes required by customers.
NATURAL GAS PURCHASES. The Company purchases natural gas from a variety of
suppliers under contracts with varying terms and conditions intended to ensure a
stable supply of natural gas. When purchasing natural gas, the Company considers
price, location, liquids content, if applicable, and quantities available. In
1998, the Company purchased natural gas in every major producing basin in the
United States and Canada from over 700 suppliers, ranging from major producers
to small independent companies. Pursuant to ancillary agreements entered into as
part of the Chevron Combination, Dynegy has the obligation to purchase and the
right to market substantially all of the natural gas produced or controlled by
Chevron in the United States (except Alaska). The Chevron relationship provides
the Company with a significant, stable supply of natural gas which, when
combined with gas supplies available from its network of other supply sources,
allows it to effectively manage gas supplies and reduces the risk of short-term
supply shortages during periods of peak demand.
TRANSPORTATION. The Company arranges for transportation of the natural gas
it markets from the supplier receipt point to the delivery point requested by
the purchaser. The Company generally retains title to the natural gas from the
receipt point to the delivery point and obtains transportation on unaffiliated
pipelines. The Company believes that its understanding of the United States'
pipeline network, along with the scale and geographic reach of its gas marketing
efforts, are important to the Company's success as a gas marketer. The Company
uses a variety of transportation arrangements to move its customers' volumes,
including short-term and long-term firm and interruptible agreements with
pipelines and brokered firm contracts with its customers.
NATURAL GAS SALES. The Company sells natural gas under sales agreements
that have varying terms and conditions intended to match seasonal and other
changes in demand. The Company's wholesale customer base consists primarily of
gas and electric utilities and industrial and commercial end-users and marketers
of natural gas. In 1998, sales were made to approximately 900 customers located
throughout the contiguous United States and parts of Canada. For the year ended
December 31, 1998, the Company's North American operations sold an aggregate
average of 8.2 Bcf per day of natural gas.
NATURAL GAS STORAGE. Natural gas storage capacity plays an important role
in the Company's ability to act as a full-service natural gas marketer by
allowing it to manage relatively constant gas supply volumes with uneven demand
levels. Through the use of its storage capabilities, the Company offers peak
delivery services to satisfy winter heating and summer electric-generating
demands. Storage inventories also provide performance security or "backup"
service to the Company's customers. The Company at various times leases short-
term and long-term firm and interruptible storage.
UNITED KINGDOM. Beginning in 1997, the Company began an independent energy
marketing business through a wholly owned subsidiary in the United Kingdom.
Additionally, Dynegy maintains a twenty-five percent participating preferred
stock interest in Accord Energy Limited ("Accord"), a U.K.-based energy
marketing company. During 1998, the Company's U.K. subsidiary purchased product
from 42 suppliers and marketed sales to 35 customers. For the year ended
December 31, 1998, the Company's U.K.-based operations sold an aggregate average
of 0.7 Bcf per day of natural gas.
WHOLESALE GAS AND POWER SEGMENT - POWER
Dynegy markets electricity and power products and services through Electric
Clearinghouse Inc. ("ECI"), an indirect wholly-owned subsidiary, providing a 24-
hour-a-day resource for the sale and purchase of power through access to
wholesale markets throughout North America. The Company helps generation
customers manage and optimize their fuel supplies, optimize generation assets
and capacity utilization and maximize energy conversion and tolling
opportunities. In addition, the Company provides market aggregation and sales
assistance and risk-management services and strategies. The Company will at
times contract for transmission capacity over regulated transmission lines in
order to facilitate regional movements of power. In 1998, Dynegy made sales to
approximately 180 customers and sold 121 million-megawatt hours of electricity.
5
Dynegy has interests in thirty-one power projects in operation, under
construction, in late stage development or pending acquisition having combined
gross capacity of 6,832 megawatts of electricity. The majority of these
facilities are gas-fired and are principally owned through interests in joint
ventures formed to operate the plants. In addition to ownership and operation of
generating capacity, the Company provides services to the joint ventures in
which it owns an interest in the areas of project development, engineering,
environmental affairs, operating services, management and fuel supply services.
Such management services include:
. Engineering oversight of all conceptual planning, feasibility studies,
environmental studies and plant, engineering and construction design;
. Specialized and comprehensive operating, maintenance, testing and start-up
services;
. Power and fuel management involving purchases and sales for and from the
projects;
. Contract negotiation;
. Development and maintenance of business plans and forecasts;
. Development and implementation of profit improvement opportunities;
. Monitoring regulatory, legislative, and environmental affairs; and
. Providing various accounting and financial services.
LIQUIDS SEGMENT - NATURAL GAS GATHERING AND PROCESSING
The natural gas processing industry is a major segment of the oil and gas
industry, providing the necessary service of refining raw natural gas into
marketable pipeline quality natural gas and natural gas liquids. The Company
owns interests in 42 gas processing plants, including 35 plants that it
operates, as well as associated and stand-alone natural gas gathering pipeline
systems. These assets are primarily located in the key producing areas of New
Mexico, Texas, Louisiana, Arkansas, Oklahoma, Kansas and Alberta, Canada.
During 1998, the Company processed an average of 2.3 Bcf per day of natural
gas and produced an average of 110.0 thousand barrels per day of natural gas
liquids. As part of the Chevron Combination's ancillary agreements, Dynegy
acquired the right to process substantially all of Chevron's processable natural
gas in those geographic areas where it is economically feasible for Dynegy to
provide such service.
LIQUIDS SEGMENT - FRACTIONATION
Natural gas liquids removed from the natural gas stream at gas processing
plants are generally in the form of a commingled stream of liquid hydrocarbons
(raw product). The commingled natural gas liquids are separated at fractionation
facilities into the component products of ethane, propane, normal butane,
isobutane and natural gasoline. The Company has ownership interests in three
fractionation facilities; two in Mont Belvieu, Texas and one in Lake Charles,
Louisiana. During 1998, these facilities fractionated an average of 285 thousand
gross barrels per day.
LIQUIDS SEGMENT - NGL MARKETING
The Company markets its own NGL production and also purchases NGLs from
third parties for resale. During 1998, the Company sold approximately 410
thousand barrels per day of natural gas liquids to over 900 customers.
LIQUIDS SEGMENT - TRANSPORTATION OPERATIONS
The Company's transportation assets are inter-connected with the nation's
gas liquids and natural gas pipeline systems. Through this network of pipeline
connections, terminals, rail cars, trucks, barges and storage facilities, the
Company moves natural gas liquids from producing regions in the Gulf Coast, West
and Midwest to most major domestic and international markets. The Company
operates large-scale marine terminals in Texas, Florida and Louisiana, which
offer importers a variety of methods for transporting products to the
marketplace. In addition, Dynegy has access to over 60 million barrels of
underground liquids storage providing customers with the ability to store,
trade, buy and sell specification products. Dynegy also leases large-hull ships
capable of importing/exporting liquid petroleum gas to/from markets throughout
the world.
6
LIQUIDS SEGMENT - CRUDE OIL MARKETING
The Company provides a full range of crude oil marketing services to
producers, and serves the North American refining community as a regionally
diversified supplier of crude oil. Through its participation in major trading
centers in Canada and the Mid-Continent, Rocky Mountain and Gulf Coast areas,
the Company has established itself as a dependable source of competitively
priced crude oil. During 1998, the Company sold approximately 240 thousand
barrels per day of crude oil to over 100 customers.
LIQUIDS SEGMENT - INTERNATIONAL LPG MARKETING
The Company markets and trades LPG to markets throughout the world through
use of chartered large-hull ships. Product marketed and traded by this business
is acquired from producing areas in the North Sea, West Africa, Algeria and the
Arabian Gulf as well as from the U.S. Gulf Coast region. Currently, this
business markets approximately 75,000 barrels per day of LPG.
RISK MANAGEMENT ACTIVITIES
Dynegy utilizes certain types of fixed-price forward purchase and sales
contracts, futures and option contracts traded on the New York Mercantile
Exchange and swaps and options traded in the over-the-counter financial markets
to:
. Manage and hedge its fixed-price purchase and sales commitments;
. Provide fixed-price commitments as a service to its customers and suppliers;
. Reduce its exposure to the volatility of cash market prices;
. Protect its investment in storage inventories; and
. Hedge fuel requirements at its gas processing and power generation
facilities.
The Company may, at times, have a bias in the market, within established
guidelines, resulting from the management of its portfolio. Additionally, Dynegy
monitors its exposure to fluctuations in interest rates and foreign currency
exchange rates and may execute swaps, forward-exchange contracts or other
financial instruments to hedge and manage these exposures.
In addition to the risk associated with price or interest rate movements,
credit risk is also inherent in the Company's risk management activities. Credit
risk relates to the risk of loss resulting from the nonperformance of
contractual obligations by a counterparty. Dynegy maintains credit policies with
regard to its counterparties, which management believes minimize its overall
credit risk.
The commercial groups of Dynegy manage, on a portfolio basis, the resulting
market risks inherent in the transactions, subject to parameters established by
the Dynegy Board of Directors. Market risks are monitored by a risk control
group that operates independently from the commercial units that create or
actively manage these risk exposures to ensure compliance with Dynegy's risk
management policies. Risk measurement is also practiced against the Dynegy
portfolios with value at risk, stress testing and scenario analysis.
As a result of recent pronouncements issued by the Financial Accounting
Standards Board and the Emerging Issues Task Force, the Company's comprehensive
method of accounting for energy-related contracts and/or derivative instruments
and hedging activities is changing effective January 1, 1999. Refer to "Item 7.
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8. - Financial Statements and Supplementary Data", for
further discussion and analysis of the effects of these accounting principle
changes.
COMPETITION
All phases of the businesses in which Dynegy is engaged are highly
competitive. In connection with both domestic and foreign operations, the
Company encounters strong competition from companies of all sizes, having
varying levels of financial and personnel resources.
Dynegy competes in its gas marketing business with other natural gas
merchants, producers and pipelines for sales based on its ability to aggregate
competitively priced supplies from a variety of sources and locations and to
utilize transportation efficiently through third-party pipelines. With respect
to its marketing operations, Dynegy believes that:
7
. Customers will increasingly scrutinize the financial condition of their
suppliers to assure that contract obligations will be met;
. Suppliers and transporters will demand more stringent credit terms to secure
the performance of natural gas merchants;
. The increased role of storage and other risk management tools will add to the
financial costs of doing business;
. The increasing availability of pricing information to participants in the
natural gas industry will continue to exert downward pressure on per-unit
profit margins in the industry;
. Suppliers will have to be multi-fuel marketers; and
. Large competitors will create competition from entities having significant
liquidity and other resources.
As a result, Dynegy believes its financial condition and its access to capital
markets will play an increasing role in distinguishing the Company from many of
its competitors. Operationally, Dynegy believes its ability to remain a low-cost
merchant and to effectively combine value-added services, competitively priced
supplies and price risk management services will determine the level of success
in its natural gas marketing operations.
Dynegy's power marketing business is similar to its gas marketing business
in that it provides contract services to electric utilities, markets and
supplies electricity and invests in power-related assets and joint ventures. As
a result, the competitive issues incumbent upon the Company's gas marketing
operations similarly affect the Company's power marketing business. As with its
gas marketing operations, the Company believes it has the ability to establish
itself as a low cost and dependable merchant providing competitively priced
supplies and a variety of services which will differentiate Dynegy from the
competition.
The independent power generation industry has grown rapidly over the past
twenty years. The demand for power may be met by generation capacity based on
several competing technologies, such as gas-fired or coal-fired cogeneration and
power generating facilities fueled by alternative energy sources including hydro
power, synthetic fuels, solar, wind, wood, geothermal, waste heat, solid waste
and nuclear sources. The Company's power generation business competes with other
non-utility generators, regulated utilities, unregulated subsidiaries of
regulated utilities and other energy service companies in the development and
operation of energy-producing projects. The trend towards deregulation in the
U.S. electric power industry has resulted in a highly competitive market for
acquisition or development of domestic power generating facilities. As the
nation's regulated utilities seek non-regulated investments and states move
toward retail electric competition, these trends can be expected to continue for
the foreseeable future.
The Company's natural gas liquids, crude oil marketing and gas transmission
businesses face significant competition from a variety of competitors including
major integrated oil companies, major pipeline companies and their marketing
affiliates and national and local gas gatherers, processors, brokers, marketers
and distributors of varying sizes and experience. The principal areas of
competition include obtaining gas supplies for gathering and processing
operations, obtaining supplies of raw product for fractionation, the marketing
of natural gas liquids, crude oil, residue gas, helium, condensate and sulfur,
and the transportation of natural gas, natural gas liquids and crude oil.
Competition typically arises as a result of the location and operating
efficiency of facilities, the reliability of services and price and delivery
capabilities. The Company believes it has the infrastructure, long-term
marketing abilities, financial resources and management experience to enable it
to effectively compete.
Regulation
General. The Company is subject to the laws, rules and regulations of the
jurisdictions and countries in which it conducts its operations. The regulatory
burden on the energy industry increases its cost of doing business and,
consequently, affects its profitability. Inasmuch as these rules and regulations
are frequently amended or reinterpreted, the Company is unable to predict the
future cost or impact of complying with such regulations. These rules and
regulations affect the industry as a whole; therefore, the Company does not
believe that it is affected in a significantly different manner from its
competitors.
NATURAL GAS REGULATION. The transportation and sale for resale of natural
gas is subject to regulation by the Federal Energy Regulatory Commission
("FERC") under the Natural Gas Act of 1938, as amended ("NGA") and, to a lesser
extent, the Natural Gas Policy Act of 1978, as amended ("NGPA"). Interstate
transportation and storage services by natural gas companies, including
interstate pipeline companies, and the rates charged for such services, are
regulated by the FERC. Certain of the Company's pipeline activities and
facilities are involved in interstate transportation of natural gas, crude oil
and natural gas liquids, and are subject to these or other federal regulations.
8
NATURAL GAS MARKETING. Commencing in 1985, the FERC promulgated a series
of orders and regulations adopting changes that significantly altered the
business of transporting and marketing natural gas by fostering competition. The
thrust of these regulations was to induce interstate pipeline companies to
provide nondiscriminatory transportation services to producers, distributors and
other shippers. The effect of the foregoing regulations has been the creation of
an open access market for natural gas purchases and sales and the creation of a
business environment which has fostered the evolution of various unregulated,
privately negotiated natural gas sales, purchase and transportation
arrangements. Regulations in Canada have resulted in a similar business
environment in that country. The sale for resale of natural gas in North America
has substantially completed its evolution to an unregulated, open access market.
The Company does not believe that any further regulatory matters will have a
material adverse effect on the Company's operations or competitiveness.
In the latter half of 1998, the FERC issued two proposed rulemakings in
which it laid out possible changes to the character of interstate transportation
services. Some proposed changes could benefit the Company, while others could
have a negative impact. It is too early to predict which, if any, changes will
be implemented.
In Canada, certain federal and provincial regulatory authorities require
parties to hold export or removal permits for transactions pursuant to which
natural gas is to be exported from the jurisdiction in which it is produced.
These requirements apply whether the gas is removed from one province to another
or from a province to the United States. The Company's indirectly wholly-owned
Canadian subsidiary, Dynegy Canada Inc., holds permits from the National Energy
Board, the Alberta Energy and Utilities Board ("AEUB") and the British Columbia
Ministry of Employment and Investment, Oil and Gas Section for such purposes. In
addition, Dynegy Canada Inc. holds export permits from the National Energy Board
similar to the foregoing for butane, propane and crude oil. In the United
Kingdom, regulation of the natural gas business is subject to regulation by the
Office of Gas Supply.
GAS PROCESSING. The primary function of Dynegy's gas processing plants is
the extraction of natural gas liquids and the conditioning of natural gas for
marketing, and not natural gas transportation. The FERC has traditionally
maintained that a processing plant is not a facility for transportation or sale
for resale of natural gas in interstate commerce and therefore is not subject to
jurisdiction under the NGA. Even though the FERC has made no specific
declaration as to the jurisdictional status of the Company's gas processing
operations or facilities, Dynegy believes its gas processing plants are
primarily involved in removing natural gas liquids and therefore exempt from
FERC jurisdiction. Nonetheless, certain facilities downstream of processing
plants are being considered for use in transporting gas between pipelines, which
may invoke FERC's jurisdiction. Such jurisdiction should apply to the downstream
facility as a pipeline, however, and not to the plants themselves.
In Canada, the AEUB governs the permitting, emissions and operations of gas
gathering and processing facilities. These facilities require a permit from the
AEUB to process or transport a specified volume of gas and a demonstration at
the time of application that the impact on the environment will be minimal.
Dynegy Canada Inc. holds all necessary permits required in order to own and
operate its processing and gathering facilities. Notwithstanding the
jurisdiction of the AEUB, the rates, terms and conditions of service of such
facilities are the result of privately negotiated arrangements.
Gathering. The NGA exempts gas-gathering facilities from the jurisdiction
of the FERC. Interstate transmission facilities, on the other hand, remain
subject to FERC jurisdiction. The FERC has historically distinguished between
these two types of facilities on a fact-specific basis. Dynegy believes its
gathering facilities and operations meet the current tests used by the FERC to
determine a nonjurisdictional gathering facility status. Some of the recent
cases applying these tests in a manner favorable to the determination of
Dynegy's nonjurisdictional status are still subject to rehearing and appeal. In
addition, the FERC's articulation and application of the tests used to
distinguish between jurisdictional pipelines and nonjurisdictional gathering
facilities have varied over time. While the Company believes current definitions
create nonjurisdictional status for Dynegy's gathering facilities, no assurance
can be given that such facilities will remain classified as gas gathering
facilities and the possibility exists that the rates, terms, and conditions of
the services rendered by those facilities, and the construction and operation of
the facilities will be subject to regulation by the FERC or by the various
states in the absence of FERC regulation.
OTHER REGULATORY ISSUES. The Company's gas purchases and sales are
generally not regulated by the FERC or other regulatory authorities; however, as
a gas merchant, the Company depends on the gas transportation and storage
services offered by various pipeline companies to enable the sale and delivery
of its gas supplies. Additionally, certain other pipeline activities and
facilities of the Company are involved in interstate and intrastate
transportation and storage services and are subject to various federal and state
regulations which generally regulate rates, terms and conditions of service.
9
ELECTRICITY MARKETING REGULATION. The Federal Power Act ("FPA") and rules
promulgated by the FERC regulate the transmission of electric power in
interstate commerce and sales for resale of that power. As a result, portions of
ECI's operations are under the jurisdiction of the FPA and FERC. In April 1996,
the FERC adopted rules ("Order 888") to expand transmission service and access
and provide alternative methods of pricing for transmission services. Order 888
is intended to open the FERC-jurisdictional interstate transmission grid in the
continental United States to all qualified persons that seek transmission
services to wheel wholesale power. Utilities are required to provide
transmission customers non-discriminatory open access to their transmission
grids with rates, terms, and conditions comparable to that which the utility
imposes on itself. Order 888 was upheld by the FERC in March 1997 and is
subject to appeal. Second generation implementation issues arising out of Order
888 abound. These include issues relating to power pool structures and
transmission pricing. These too will likely find their way to the courts, and
their outcome cannot be predicted.
POWER GENERATION REGULATION. Historically in the United States, regulated
and government-owned utilities have been the only significant producers of
electric power for sale to third parties. Pursuant to the enactment of the
federal Public Utility Regulatory Policies Act of 1978 ("PURPA"), companies
other than utilities were encouraged to enter the electric power business by
reducing regulatory constraints. In addition, PURPA and its implementing
regulations created unique opportunities for the development of cogeneration
facilities by requiring utilities to purchase electric power generated in
cogeneration plants meeting certain requirements (referred to as "Qualifying
Facilities"). As a result of PURPA, a significant market for electric power
produced by independent power producers developed in the United States. The
exemptions from extensive federal and state regulation afforded by PURPA to
Qualifying Facilities are important to Dynegy and its competitors. Many of the
projects that Dynegy currently owns meet the requirements under PURPA to be
Qualifying Facilities and are maintained on that basis.
In 1992, Congress enacted the Energy Policy Act of 1992 ("Energy Act"),
which amended the FPA and the Public Utility Holding Company Act of 1935
("PUHCA") to create new exemptions from PUHCA for independent power producers
selling electric energy at wholesale, to increase electricity transmission
access for independent power producers and to reduce the burdens of complying
with PUHCA's restrictions on corporate structures for owning or operating
generating or transmission facilities in the United States or abroad. The Energy
Act has enhanced the development of independent power projects and has further
accelerated the changes in the electric utility industry that were initiated by
PURPA.
Changes in PURPA, PUHCA and other related federal statutes may occur in the
next several years. The nature and impact of such changes on the Company's
projects, operations and contracts is unknown at this time. Dynegy actively
monitors these developments to determine such impacts as well as to evaluate new
business opportunities created by restructuring of the electric power industry.
Depending on the outcome of these legislative matters, changes in legislation
could have an adverse effect on current contract terms.
The enactment in 1978 of PURPA and the adoption of regulations thereunder
by the FERC and individual states provide incentives for the development of
small power production facilities and cogeneration facilities meeting certain
criteria. In order to be a Qualifying Facility, a cogeneration facility must (i)
produce not only electricity but also a certain quantity of thermal energy (such
as steam) which is used for a qualified purpose other than power generation,
(ii) meet certain energy operating and efficiency standards when oil or natural
gas is used as a fuel source and (iii) not be controlled or more than 50 percent
owned by an electric utility or electric utility holding company, or any
combination thereof. PURPA provides two primary benefits to Qualifying
Facilities owned and operated by non-utility generators. First, Qualifying
Facilities under PURPA are exempt from certain provisions of PUHCA, the FPA and,
except under certain limited circumstances, state laws respecting rate and
financial regulation. Second, PURPA requires that electric utilities purchase
electricity generated by Qualifying Facilities at a price equal to the
purchasing utility's full "avoided cost" and that the utility sell back-up power
to the Qualifying Facility on a non-discriminatory basis. The FERC regulations
also permit Qualifying Facilities and utilities to negotiate agreements for
utility purchases of power at rates other than the purchasing utility's avoided
cost. If Congress amends PURPA, the statutory requirement that an electric
utility purchase electricity from a Qualifying Facility at full avoided costs
could be eliminated. Although current legislative proposals specify the honoring
of existing contracts, repeal of the statutory purchase requirements of PURPA
going forward could increase pressure to renegotiate existing contracts. Any
changes that result in lower contract prices could have an adverse effect on the
Company's operations and financial position.
The Congress passed the Energy Act to promote further competition in the
development of new wholesale power generation sources. Through amendments to
PUHCA, the Energy Act encourages the development of independent power projects
that are certified by the FERC as exempt wholesale generators ("EWGs"). The
owners or operators of qualifying EWGs are exempt from the provisions of PUHCA.
The Energy Act also provides the FERC with extensive new authority to order
electric utilities to provide other electric utilities, Qualifying Facilities
and independent power projects with access to their transmission systems.
However, the Energy Act does preclude the FERC from ordering transmission
services to retail customers and prohibits
10
"sham" wholesale energy transactions which appear to provide wholesale service,
but actually are providing service to retail customers.
The FPA grants the FERC exclusive ratemaking jurisdiction over wholesale
sales of electricity in interstate commerce. The FPA provides the FERC with
ongoing as well as initial jurisdiction, enabling the FERC to revoke or modify
previously approved rates. Such rates may be based on a cost-of-service approach
or on rates that are determined through competitive bidding or negotiation on a
market basis. Although Qualifying Facilities under PURPA are exempt from
ratemaking and certain other provisions of the FPA, independent power projects
and certain power marketing activities are subject to the FPA and to the FERC's
ratemaking jurisdiction. Utilities are not obligated to purchase power from
projects subject to regulation by the FERC under the FPA because they do not
meet the requirements of PURPA. However, because such projects would not be
bound by PURPA's thermal energy use requirement, they may have greater latitude
in site selection and facility size. All of the projects currently owned or
operated by Dynegy as Qualifying Facilities under PURPA are exempt from the FPA.
Dynegy's EWGs, El Segundo, Long Beach, Commonwealth Atlantic and Hartwell, are
subject to the FPA and the jurisdiction of the FERC. With approval from FERC,
such entities, with certain exceptions, are exempted from being required to sell
at cost-based rates and can make all sales at market-based rates set through
negotiations. Independent power projects in which the Company has an interest
and that are not Qualifying Facilities have been granted market based rate
authority and comply with the FPA requirements governing approval of wholesale
rates and subsequent transfers of ownership interests in such projects.
Development of projects in international markets typically creates exposure
and obligations to the national, provincial and local laws of each host country,
worldwide environmental standards and requirements imposed by multi-lateral
lending institutions. The principal regulatory consideration for international
projects is PUHCA, since it is broadly applicable to the ownership and operation
of power facilities (including generation and transmission facilities) both
inside and outside of the United States. For international projects, the
principal basis for exemption from PUHCA is by obtaining EWG status from the
FERC. EWG status is very beneficial for international projects because EWGs are
generally allowed to make retail sales in international markets. Another way to
obtain an exemption from PUHCA for foreign ownership and operation activities is
by filing a foreign utility company determination ("FUCO") with the Securities
and Exchange Commission. However, FUCO filings are less frequently used,
because unlike EWGs, no formal regulatory order is issued confirming the status
of a FUCO. The development of international power generation and transmission
projects also may entail other multi-national regulatory considerations arising
under United States law, including export/import controls, trade laws and other
similar legislation. Dynegy attempts to identify and manage those issues early
in the development process to ensure compliance with such laws and regulations.
STATE REGULATORY REFORMS. Legislation currently under review in various
states affecting gas and power marketing and power generation businesses is most
likely to impact Dynegy in the near term. However, other state regulatory
reforms impacting the Company's processing and gathering operations and other
businesses are proceeding. While the ultimate impact of such legislation on the
Company's businesses cannot be predicted with certainty, the Company does not
believe that the outcome of these matters will have a material adverse effect on
the Company's operations or competitiveness.
ENVIRONMENTAL AND OTHER MATTERS
Dynegy's operations are subject to extensive federal, state and local
statutes, rules and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection. Development of
projects in international markets creates exposure and obligations to the
national, provincial and local laws of each host country, including
environmental standards and requirements imposed by these governments.
Compliance with these statutes, rules and regulations requires capital and
operating expenditures including those related to monitoring, pollution control
equipment, emission fees and permitting at various operating facilities and
remediation obligations. Failure to comply with these statutes, rules and
regulations may result in the assessment of civil and even criminal penalties.
The Company's environmental expenditures have not been prohibitive in the past,
but are anticipated to increase in the future with the trend toward stricter
standards, greater regulation, more extensive permitting requirements and an
increase in the number and types of assets operated by the Company subject to
environmental regulation. No assurance can be given that future compliance with
these environmental statutes, rules and regulations will not have a material
adverse effect on the Company's operations or its financial condition.
The vast majority of federal environmental remediation provisions are
contained in the Superfund laws -- the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and the Superfund Amendments and
Reauthorization Act ("SARA") and in the corrective action provisions of the
Federal Resource Conservation and Recovery Act ("RCRA"). Typically, the U.S.
Environmental Protection Agency ("EPA") acts pursuant to Superfund legislation
to
11
remediate facilities that are abandoned or inactive or whose owners are
insolvent; however, the legislation may be applied to sites still in operation.
Superfund law imposes liability, regardless of fault or the legality of the
original conduct, on certain classes of persons that contributed to the release
of a "hazardous substance" into the environment. These persons include the
current or previous owner and operator of a facility and companies that
disposed, or arranged for the disposal, of the hazardous substance found at a
facility. CERCLA also authorizes the EPA and, in certain instances, private
parties to take actions in response to threats to public health or the
environment and to seek recovery for the costs of cleaning up the hazardous
substances that have been released and for damages to natural resources from
such responsible party. Further, it is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment. RCRA
provisions apply to facilities that have been used to manage or are currently
managing hazardous waste and which are either still in operation or have
recently been closed. As amended, RCRA requires facilities to remedy any
releases of hazardous wastes or hazardous waste constituents at waste treatment,
storage or disposal facilities.
In connection with discrete asset acquisitions and sales, Dynegy may obtain
or be required to provide indemnification against certain environmental
liabilities. These indemnities are typically limited in scope and time period.
To minimize its exposure for such liabilities, environmental audits of the
assets Dynegy wishes to acquire are made, either by Dynegy personnel, outside
environmental consultants, or a combination of the two. The Company has not
heretofore incurred any material environmental liabilities arising from its
acquisition or divestiture activities. The incurrence of a material
environmental liability, and/or the failure of an indemnitor to meet its
indemnification obligations with respect thereto, could have a material adverse
effect on Dynegy's operations and financial condition.
To the Company's knowledge, it is in substantial compliance with, and is
expected to continue to comply in all material respects with, applicable
environmental statutes, regulations, orders and rules. Further, to the best of
the Company's knowledge, there are no existing, pending or threatened actions,
suits, investigations, inquiries, proceedings or clean-up obligations by any
governmental authority or third party relating to any violations of any
environmental laws with respect to the Company's assets or pertaining to any
indemnification obligations with respect to properties previously owned or
operated by the Company which would have a material adverse effect on the
Company's operations and financial condition. Dynegy's aggregate expenditures
for compliance with laws and regulations related to the discharge of materials
into the environment or otherwise related to the protection of the environment
approximated $9 million in 1998. Total environmental expenditures for both
capital and operating maintenance and administrative costs are not expected to
exceed $14 million in 1999.
In addition to environmental regulatory issues, the design, construction,
operation and maintenance of the Company's pipeline facilities are subject to
the safety regulations established by the Secretary of the Department of
Transportation pursuant to the Natural Gas Pipeline Safety Act ("NGPSA"), or by
state regulations meeting the requirements of the NGPSA, or to similar statutes,
rules and regulations in Canada. The Company believes it is currently in
substantial compliance, and expects to continue to comply in all material
respects, with these rules and regulations.
The Company's operations are subject to the requirements of the Federal
Occupational Safety and Health Act ("OSHA") and other comparable federal, state
and provincial statutes. The OSHA hazard communication standard, the EPA
community right-to-know regulations under Title III of SARA and similar state
statutes require that information be organized and maintained about hazardous
materials used or produced in its operations. Certain of this information must
be provided to employees, state and local government authorities and citizens.
The Company believes it is currently in substantial compliance, and expects to
continue to comply in all material respects, with these rules and regulations.
OPERATIONAL RISKS AND INSURANCE
Dynegy is subject to all risks inherent in the various businesses in which
it operates. These risks include, but are not limited to, explosions, fires and
product spillage, which could result in damage to or destruction of operating
assets and other property, or could result in personal injury, loss of life or
pollution of the environment, as well as curtailment or suspension of operations
at the affected facility. Dynegy maintains general public liability, property
and business interruption insurance in amounts that it considers to be adequate
for such risks. Such insurance is subject to deductibles that the Company
considers reasonable and not excessive. The occurrence of a significant event
not fully insured or indemnified against, and/or the failure of a party to meet
its indemnification obligations, could materially and adversely affect Dynegy's
operations and financial condition. Moreover, no assurance can be given that
Dynegy will be able to maintain insurance in the future at rates it considers
reasonable.
12
The Company has designated two of its subsidiaries to assist in the
management of certain liabilities principally relating to environmental,
litigation and credit reserves. Together with the involvement of third parties
whose primary consideration will be based on the realization of savings by the
Company, the subsidiaries will attempt to find new ways to handle these costs in
a more efficient manner.
EMPLOYEES
The Company employs approximately 1,220 employees at its administrative
offices and approximately 1,214 employees at its operating facilities.
Approximately 137 employees at Company-operated facilities are subject to
collective bargaining agreements with one of the following unions: the Oil,
Chemical and Atomic Workers International Union, the Metal Trades Council or the
Communications, Energy and Paperworkers Union. Management considers relations
with both union and non-union employees to be satisfactory.
ITEM 1A. EXECUTIVE OFFICERS
Set forth below are the names and positions of the current executive
officers of the Company, together with their ages, position(s) and years of
service with the Company.
Served with the
Name Age * Position(s) Company Since
C. L. Watson 49 Chairman of the Board, Chief Executive Officer, 1985
and a Director of the Company
Stephen W. Bergstrom 41 President and Chief Operating Officer of 1986
Dynegy Marketing and Trade, and a Director
of the Company
John U. Clarke 46 Senior Vice President, Chief Financial Officer 1997
of the Company, and an Advisory Director of
the Company
Dan W. Ryser 49 Executive Vice President of Dynegy Marketing 1993
and Trade
Stephen A. Furbacher 51 President and Chief Operating Officer of 1996
Dynegy Mid-Stream Services
Kenneth E. Randolph 42 Senior Vice President, General Counsel and 1984
Secretary of the Company
* As of April 1, 1999.
The executive officers named above will serve in such capacities until the
next annual meeting of the Company's Board of Directors, or until their
respective successors have been duly elected and have been qualified, or until
their earlier death, resignation, disqualification or removal from office.
C. L. Watson is the Chairman and Chief Executive Officer of Dynegy Inc. He
joined the company as President in 1985 and became Chairman and Chief Executive
Officer of NGC Corporation, Dynegy's predecessor, in 1989. Prior to his
employment with Clearinghouse, he served as Director of Gas Sales for the
Western United States for Conoco Inc. Mr. Watson serves on the board of
directors of Baker Hughes Incorporated.
Stephen W. Bergstrom, President and Chief Operating Officer of Dynegy
Marketing and Trade and Senior Vice President of Dynegy Inc., is responsible for
natural gas and power marketing, generation and international functions. He is
also a member of Dynegy's board of directors. After joining Natural Gas
Clearinghouse, the predecessor of Dynegy, in 1986 as Vice President of Gas
Supply, Mr. Bergstrom was promoted to Senior Vice President of Gas Marketing and
Supply in 1987. In 1990, he was named Executive Vice President of Natural Gas
Clearinghouse. Prior to joining the Company, Mr. Bergstrom
13
was Vice President of Gas Supply for Enron Gas Marketing. Mr. Bergstrom began
his professional career with Transco Energy Company of Houston.
John U. Clarke joined the Company in April 1997 as Senior Vice President
and Chief Financial Officer and serves as the Company's principal financial
officer. Mr. Clarke is also an Advisory Director of the Company. Prior to
joining Dynegy, Mr. Clarke was a managing director and co-head of a specialty
energy practice group with Simmons & Company International, an investment-
banking firm for approximately one year. He previously had served as President
of Concept Capital Group, Inc., a financial advisory firm formed by Mr. Clarke
in May, 1995. Mr. Clarke was Executive Vice President and Chief Financial and
Administrative Officer with Cabot Oil & Gas Corporation from August 1993 to
February 1995, and worked for Transco Energy Company, from April 1981 to May
1993, last serving as Senior Vice President and Chief Financial Officer. Mr.
Clarke began his career with Tenneco Inc. in January 1978.
Dan W. Ryser serves as Senior Vice President of Dynegy Inc. and executive
Vice President of Dynegy Marketing and Trade. Mr. Ryser manages the Company's
power generation business. Since joining Dynegy in 1993, Mr. Ryser has served
the Company in several capacities, including managing ECI's electricity
marketing operations. Prior to joining the Company in 1993, Mr. Ryser held
various positions at Enron Corp. including President of Enron Gas Processing
Company, President of Transwestern Pipeline Company, Executive Vice President of
Enron Gas Marketing and President of Houston Pipe Line Company.
Stephen A. Furbacher serves as President and Chief Operating Officer of
Dynegy Mid-Stream Services. In this capacity, Mr. Furbacher is responsible for
the operations of Dynegy's North American mid-stream liquids operations, as well
as the global liquefied petroleum gas transportation and natural gas liquids
marketing operations. The North American mid-stream liquids operations are
actively engaged in the gathering and processing of natural gas and the
transportation, fractionation and storage of NGLs. Prior to joining the Company
in September 1996, Mr. Furbacher served as President of Warren Petroleum
Company, a division of Chevron U.S.A. Inc.
Kenneth E. Randolph serves as Senior Vice President, General Counsel and
Secretary of the Company. He has served as Senior Vice President and General
Counsel of Dynegy (or its predecessor, Clearinghouse) since July 1987. In
addition, he served as a member of the Clearinghouse Management Committee from
May 1989 through February 1994 and managed Clearinghouse's marketing operations
in the Western and Northwestern United States from July 1984 through July 1987.
Prior to his employment with the Company, Mr. Randolph was associated with the
Washington, D.C. office of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
14
ITEM 2. PROPERTIES
Over the last 5 years, Dynegy has built a national network of strategic
assets that support and enhance its wholesale gas, liquids and power marketing
franchise. The following provides a geographic view of the depth and breadth of
Dynegy's domestic strategic asset network.
DYNEGY'S STRATEGIC ASSET NETWORK
[Map appears here]
Current year operational activity conducted in these areas is discussed
under "Item 1. BUSINESS -- General." Following is a description of such
properties owned by the Company at December 31, 1998.
POWER GENERATION FACILITIES
Dynegy has interests in thirty-one power projects in operation, under
construction, in late stage development or pending acquisition. The majority of
these projects are cogeneration facilities operated by Dynegy. The portfolio
includes one heat recovery plant and one coal gasification facility. A
cogeneration plant utilizes power production technology that results in the
sequential generation of two or more useful forms of energy (e.g., electricity
and steam) from a single fuel source (e.g., natural gas). The Company's
generation assets include projects that are deemed Qualifying Facilities, EWGs
and "Merchant Plants". A Qualifying Facility is operated under laws outlined in
PURPA, by the FERC and by certain state legislatures, as previously discussed
herein, and typically sells the power it generates to a single power purchaser.
A Merchant Plant operates independently from designated power purchasers and as
a result will generate and sell power to the market when market economics
dictate that electricity prices exceed the cost of production. Merchant Plants
provide flexibility to the Company in executing its Energy Convergence strategy.
The combined gross capacity of facilities in operation is approximately 4,409
megawatts of electricity and over 3.4 million pounds per hour of steam sold to
third parties. The following table provides pertinent information concerning
power projects owned by the Company:
15
SUMMARY OF DYNEGY'S POWER GENERATION FACILITIES
===========================================================================================================================
POWER GENERATION PERCENT GROSS PRIMARY
PROJECT OWNED CAPACITY LOCATION FUEL PRIMARY POWER PURCHASER
- ----------------- -------- -------- -------- -------- -----------------------
(MW)
OPERATING
CoGen Power 100 5 Port Arthur, TX Waste heat Great Lakes Carbon Corporation
CoGen Lyondell Lessee (100%) 610 Channelview, TX Gas-fired Lyondell Chemical Company
Oyster Creek 50 424 Freeport, TX Gas-fired The Dow Chemical Company
Corona 40 47 Corona, CA Gas-fired SOCAL Edison Company
Kern Front 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company
High Sierra 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company
Double "C" 50 48 Kern County, CA Gas-fired Pacific Gas & Electric Company
San Joaquin 100 48 Stockton, CA Gas-fired Pacific Gas & Electric Company
Chalk Cliff 100 46 Kern County, CA Gas fired Pacific Gas & Electric Company
Badger Creek 50 46 Kern County, CA Gas-fired Pacific Gas & Electric Company
McKittrick 50 46 McKittrick, CA Gas-fired Pacific Gas & Electric Company
Live Oak 50 47 Kern County, CA Gas-fired Pacific Gas & Electric Company
Crockett 8 240 Crockett, CA Gas-fired Pacific Gas & Electric Company
Bear Mountain 100 46 Bakersfield, CA Gas-fired Pacific Gas & Electric Company
El Segundo 50 1,020 El Segundo, CA Gas-fired Merchant Facility
Long Beach 50 530 Long Beach, CA Gas-fired Merchant Facility
Black Mountain 50 85 Las Vegas, NV Gas-fired Nevada Power Company
Commonwealth Atlantic 50 340 Chesapeake, VI Gas-fired Virginia Electric & Power Company
Hartwell Energy 50 300 Hart County, GA Gas-fired Ogelthorpe Power Corporation
Michigan Power 50 123 Ludlington, MI Gas-fired Consumers Energy Company
Wabash Lessee (100%) 262 W. Terre Haute, IN Gasification PSI Energy, Inc.
-----
TOTAL 4,409
DEVELOPMENT PROJECTS (1)
Rockingham 100 800 Rockingham County, NC Gas-fired Duke Energy (3 years)
Rocky Road (2) 100 250 Chicago, IL. Gas-fired Merchant Facility
Encina Acquisition 50 1,218 San Diego County, CA. Gas-fired Merchant Facility
CoGen Lyondell Expansion 100 155 Channelview, TX. Gas-fired Merchant Facility
-----
Total 2,423
-----
TOTAL CAPACITY 6,832
============================================================================================================================
(1) The Encina Acquisition includes the Encina generating facility and
seventeen combustion turbines in the San Diego, Ca. Area. The transaction
is expected to close in the first half of 1999.
(2) This project is currently owned 100 percent by Dynegy but the Company
expects to divest itself of 50 percent of its ownership interest during
1999.
GATHERING SYSTEMS AND PROCESSING FACILITIES
Dynegy's natural gas processing services are provided at two types of gas
processing plants, referred to as field and straddle plants. Field plants
aggregate volumes from multiple producing wells into quantities that can be
economically processed to extract natural gas liquids and to remove water vapor,
solids and other contaminants. Straddle plants are situated on mainline natural
gas pipelines and allow operators to extract natural gas liquids from a natural
gas stream when the market value of natural gas liquids separated from the
natural gas stream is higher than the market value of the same unprocessed
natural gas. The following table provides certain information, including
operational data for the year ended December 31, 1998, concerning the gas
processing plants and gathering systems in which Dynegy owns an interest.
16
SUMMARY OF DYNEGY'S GAS PROCESSING FACILITIES
===================================================================================================================================
LOCATION TOTAL PLANT
-------------------------------- -----------------------------
PRACTICAL 1998 INLET NGL
GAS PROCESSING FACILITIES % OWNED COUNTY/PARISH STATE CAPACITY (2) THROUGHPUT PRODUCTION
- -----------------------------------------------------------------------------------------------------------------------------------
(MMCF/D) (1) (BPD) (1)
OPERATED FIELD PLANTS:
Binger (3) 100.00 Caddo OK 10 7.2 900.1
Bridger Lake (7) 100.00 Summit UT 25 10.5 434.0
Canadian Complex (3) 100.00 Hemphill TX 25 20.5 2,000.0
Chico Complex (3) 100.00 Wise TX 100 79.7 11,798.4
East Texas (3) 100.00 Gregg TX 34 20.1 3,379.8
Eustace (3) 100.00 Henderson TX 70 32.2 2,002.6
Fashing 58.24 Atascosa TX 38 14.3 286.8
Gladys 100.00 Alberta Can. 15 4.7 60.0
Leedey (3) 100.00 Roger Mills OK 50 31.5 2,891.2
Lefors Complex (3) 100.00 Wheeler TX 13 12.5 2,906.4
Madill (3) 100.00 Marshall OK 25 9.0 636.1
Mazeppa 100.00 Alberta Can. 82 37.6 475.0
Moores Orchard (3) 100.00 Fort Bend TX 7 3.4 71.7
Monahans (3) 100.00 Ward TX 31 24.5 1,378.1
New Hope 100.00 Franklin TX 30 16.4 993.2
Niject 16.00 Caddo OK 3.2 0.3 34.9
Ringwood (3) 100.00 Major OK 75 33.1 2,286.1
Rodman (3) 100.00 Garfield OK 65 52.7 5,086.7
Sand Hills Complex (3) 100.00 Crane TX 200 152.8 14,605.5
Sherman (3) 100.00 Grayson TX 33 20.6 853.0
Sligo 100.00 Bossier LA 40 35.4 593.8
Texarkana (3) 100.00 Miller AR 22 11.5 393.6
West Seminole (3) 40.14 Gaines TX 5 12.9 504.9
Versado Gas Processors Joint 63.00 Various TX / NM 376 161.8 19,088.0
Venture (8)
OPERATED STRADDLE PLANTS:
Barracuda 100.00 Cameron LA 190 169.4 3,442.0
Cheney 100.00 Kingman KS 85 62.9 3,603.6
Lowry (3) 100.00 Cameron LA 265 67.6 1,647.8
Stingray 100.00 Cameron LA 300 292.5 2,229.4
Yscloskey (5) 21.00 St. Bernard LA 473 372.8 6,351.0
NON-OPERATED FIELD PLANTS:
Diamond M (3) 3.98 Scurry TX 1 0.7 117.9
Spivey (4) (5) 3.87 Harper KS 3 0.8 43.2
Dover Hennessey (3) 18.29 Kingfisher OK 14 5.0 525.6
Indian Basin (3) 14.29 Eddy NM 30 27.1 1,519.1
Maysville (3) 44.00 Garvin OK 59 38.1 5,245.8
Snyder (3) (6) 3.25 Scurry TX 2 1.8 73.9
NON-OPERATED STRADDLE PLANTS:
Bluewater 16.72 Acadia LA 122 42.8 952.1
Calumet (5) 21.91 St. Mary's LA 300 223.4 4,696.1
Iowa 9.92 Jefferson LA 50 31.2 647.5
Davis
Patterson 1.09 St. Mary's LA 3 0.7 26.4
Sea Robin 18.70 Vermillion LA 187 17.6 803.6
Terrebone 0.83 Terrebone LA 10 4.0 74.8
Toca 8.86 St. Bernard LA 93 114.2 4,361.8
==============================================================================================================================
(1) Capacity, throughput and gross production are net to the Company's
ownership interest.
(2) Capacity data is at practical recovery rates, net to Dynegy's interest.
(3) Dynegy owns the indicated percentage of an associated gas gathering system.
(4) Dynegy owns 2.19 percent of the associated gas gathering system.
(5) Dynegy ownership is adjustable and subject to periodic (usually annual)
redetermination.
(6) Dynegy owns the indicated percentage of the Snyder gas gathering system and
3.98 percent of the Diamond M gas gathering system that also supplies the
Snyder plant.
(7) This facility consists of a 100 percent interest in a processing plant and
an NGL pipeline, a 100 percent interest in a crude oil pipeline and a 33.33
percent interest in reserves connected and dedicated to the plant.
(8) Versado Gas Processors includes the Saunders, Monument and the Eunice
Complex facilities. Ownership in the Saunders, Monument and Eunice
facilities changed from 100 percent to 63 percent during 1998 as a result
of formation of a joint venture with Texaco. Statistical information
includes the aggregate inlet gas throughput and NGL production volumes
accruing to Dynegy's interest during the year.
17
FRACTIONATION FACILITIES
The following table provides certain information concerning stand alone
fractionation facilities in which Dynegy owns an interest.
SUMMARY OF DYNEGY'S FRACTIONATION FACILITIES (1)
PERCENT 1998
FRACTIONATION FACILITIES OWNED GROSS CAPACITY (2) NET CAPACITY (2) INLET THROUGHPUT
------------------------ ------- ------------------ ---------------- ----------------
(MBbls/d) (MBBLS/D) (MBBLS/D)
Lake Charles, La. (3) 100.00 55 55 28
Cedar Bayou Fractionators (Mont Belvieu, Tx.) (4) 88.00 205 180 158
Gulf Coast Fractionators (Mont Belvieu, Tx.) 38.75 110 42 99
=======================================================================================================================
(1) Table does not include fractionation operations at VESCO or at other gas
processing facilities.
(2) Gross capacity data is at practical recovery rates and net capacity is at
practical rates multiplied by Dynegy's interest.
(3) The Lake Charles, La. Fractionator extracts ethane and propane only.
(4) Effective January 1, 1998, Dynegy's interest in this facility was reduced
to 88 percent as a result of a formation of a joint venture with Amoco.
STORAGE AND TERMINAL FACILITIES
The following table provides information concerning terminal and storage
facilities owned by the Company:
SUMMARY OF DYNEGY'S STORAGE AND TERMINAL FACILITIES
LOCATION
----------------------------------------
STORAGE AND TERMINAL
FACILITIES % OWNED COUNTY/PARISH STATE DESCRIPTION
--------------------------------------------------------------------------------------------------------------------
Hackberry Storage 100.00 Cameron LA NGL storage facility
Mont Belvieu Storage 100.00 Chambers TX NGL storage facility
Hattiesburg Storage 100.00 Washington MS NGL storage facility
Mont Belvieu Terminal 100.00 Chambers TX Product terminal facility
Galena Park Terminal 100.00 Harris TX LPG import/export terminal
Calvert City Terminal 100.00 Marshall KY Product transport terminal
Greenville Terminal 100.00 Washington MS Propane terminal
Hattiesburg Terminal 50.00 Forrest MS Propane terminal
Pt. Everglades Terminal 100.00 Broward FL Marine propane terminal
Tampa Terminal 100.00 Hillsborough FL Marine propane terminal
Tyler Terminal 100.00 Smith TX Product terminal
Mont Belvieu Transport 100.00 Chambers TX Offices and repair shop
Abilene Transport 100.00 Taylor TX Raw LPG transport terminal
Bridgeport Transport 100.00 Jack TX Raw LPG transport terminal
Gladewater Transport 65.00 Gregg TX Raw LPG transport terminal
Grand Lake Tank Farm 100.00 Cameron LA Condensate storage
====================================================================================================================
18
NATURAL GAS, LIQUIDS AND CRUDE OIL PIPELINES
Dynegy owns interests in various interstate and intrastate pipelines and
gathering systems as follows:
SUMMARY OF DYNEGY'S PIPELINE ASSETS
PIPELINE SYSTEMS % OWNED 1998 THROUGHPUT (1) STATES DESCRIPTION
--------------------------------------------------------------------------------------------------------------------
Crude Oil Pipeline System 100.00 24.1 TX/OK Crude oil pipelines
Kansas Gas Supply 100.00 61.5 KS/OK Intrastate natural gas pipeline
Dynegy NGL Pipeline 100.00 27.1 TX/LA Interstate liquids pipeline
Bridger Lake/Phantex 100.00 0.4 UT/WY Interstate liquids pipeline
Pipeline
Pelican Pipeline 100.00 42.0 LA Gas gathering pipeline
Vermillion Pipeline 100.00 11.4 Gulf of Mexico Gas gathering pipeline
Western Gas Gathering 100.00 2.9 KS Gas gathering pipeline
Pawnee Rock 100.00 11.7 KS Gas gathering pipeline
Seahawk 100.00 41.2 LA Intrastate natural gas pipeline
Dynegy Midstream Pipeline, 100.00 34.1 OK Intrastate natural gas pipeline
Inc.
Dynegy Intrastate Gas 100.00 6.2 TX Intrastate natural gas pipeline
Supply
Lake Boudreaux 100.00 1.0 LA Gas gathering pipeline
Grand Lake Liquids System 100.00 1.3 LA Intrastate liquids pipeline
====================================================================================================================
(1) 1998 throughput is based on thousands of barrels per day for the liquids and
crude lines and million cubic feet per day for the gas gathering and
transportation lines.
OTHER PROPERTY INVESTMENTS
Dynegy owns a 49 percent interest in a partnership that owns and operates
the West Texas LPG Pipeline, an interstate LPG pipeline. The interest was
acquired in the Chevron Combination.
In 1996, the Company and Chevron formed Venice Gas Processing Company, a
Texas limited partnership ("Venice"). Venice was formed for the purpose of
owning and operating the Venice Complex, located in Plaquemines Parish,
Louisiana. The complex includes 271 miles of gathering pipeline that extends
into the Gulf of Mexico having capacity of 810 MMcf/d, a one lean oil gas
processing plant, a 35,000 barrel per day fractionator, a 300 MMcf/d cryogenic
gas processing unit, 12 million barrels of NGL storage capacity, a marine
terminal and acreage. In 1997, Venice reorganized as a limited liability
company changing its name to VESCO. In September 1997, the VESCO members agreed
to expand ownership in VESCO to include an affiliate of Shell Midstream
Enterprises, a subsidiary of Shell Oil Company ("Shell"), effective September 1,
1997, in exchange for Shell's commitment of certain offshore reserves to VESCO.
In 1998, ownership in the LLC was again expanded to include Koch, in exchange
for their contribution of the cryogenic processing unit. At December 31, 1998,
Dynegy's interest in VESCO approximated 23 percent. Dynegy operates the facility
and has commercial responsibility for product distribution and sales.
During 1997, the Company contributed the Waskom gas processing facility to
the Waskom Gas Processing Company ("Waskom"), a Texas limited partnership.
Dynegy owns a 33 percent interest in Waskom, operates the facility and has
commercial responsibility for product distribution and sales.
TITLE TO PROPERTIES
The Company believes it has satisfactory title to its properties in
accordance with standards generally accepted in the energy industry, subject to
such exceptions which, in the opinion of the Company, would not have a material
adverse effect on the use or value of said properties.
The operating agreements for certain of the Company's natural gas
processing plants and fractionation facilities grant a preferential purchase
right to the plant owners in the event that any owner desires to sell its
interest. Such agreements may also require the consent of a certain percentage
of owners before rights under such agreements can be transferred. The Company is
subject, as a plant owner under such agreements, to all such restrictions on
transfer of its interest. In a few instances, the Company has granted rights of
first refusal with respect to any future sale of certain assets.
19
Certain of the Company's power generation assets are subject to rights of first
refusal or consent requirements with the Company's partners or power purchasers
which restrict the transfer of interests in the facilities.
Substantially all of Dynegy's gathering and transmission lines are
constructed on rights-of-way granted by the apparent record owners of such
property. In some instances, land over which rights-of-way have been obtained
may be subject to prior liens that have not been subordinated to the right-of-
way grants. Permits have been obtained from public authorities to cross over or
under, or to lay facilities in or along, water courses, county roads, municipal
streets and state highways, and in some instances, such permits are revocable at
the election of the grantor. Permits have also been obtained from railroad
companies to cross over or under lands or rights-of-way, many of which are also
revocable at the grantor's election. Some such permits require annual or other
periodic payments. In a few minor cases, property was purchased in fee.
INDUSTRY SEGMENTS
Segment financial information is included in Note 15 of Dynegy's
consolidated financial statements contained elsewhere herein.
Item 3. LEGAL PROCEEDINGS
On April 17, 1997, Pacific Gas and Electric Company ("PG&E") filed a
lawsuit in the Superior Court of the State of California, City and County of San
Francisco, against Destec, Destec Holdings, Inc. and Destec Operating Company
(wholly-owned subsidiaries of the Company now known respectively as Dynegy Power
Corp., Dynegy Power Holdings, Inc. and Dynegy Operating Company) as well as
against San Joaquin CoGen Limited ("San Joaquin" or the "Partnership") and its
general partners (collectively the "Dynegy Defendants"). Dynegy Power Corp. and
its affiliates now own all of the partnership interests in the Partnership as a
result of the purchase of the interests of the two outside partners in the
Partnership. In the lawsuit, PG&E asserts claims and alleges unspecified damages
for fraud, negligent misrepresentation, unfair business practices, breach of
contract and breach of the implied covenant of good faith and fair dealing.
PG&E alleges that due to the insufficient use of steam by San Joaquin's steam
host, the Partnership did not qualify as a cogenerator pursuant to the
California Public Utilities Code ("CPUC") Section 218.5, and thus was not
entitled under CPUC Section 454.4 to the discount the Partnership received under
gas transportation agreements entered into between PG&E and San Joaquin in 1989,
1991, 1993 and 1995. All of PG&E's claims in this suit arise out of the
Partnership's alleged failure to comply with CPUC Section 218.5. The defendants
filed a response to the suit on May 15, 1997. On October 20, 1997, PG&E named
Libbey-Owens-Ford ("LOF"), the Partnership's steam host, as an additional
defendant in the action. On February 23, 1998, PG&E served its Second Amended
Complaint on all defendants. On March 30, 1998, the defendants filed their
response to PG&E's Second Amended Complaint, denying PG&E's allegations and
alleging certain counterclaims against PG&E. By Order dated July 20, 1998, the
court dismissed certain of defendants' counterclaims against PG&E, and abated
certain others, pending resolution by the CPUC. The trial date is currently June
15, 1999. The Partnership has previously advised the FERC of PG&E's claims, and
stated that it would submit any appropriate filings upon completion of its
investigation. If the facility was found not to have satisfied the California
cogeneration facility standards, there is a strong likelihood that it would also
fail to satisfy the more stringent federal standards. In accordance with the
terms of a Protective Order entered into by the parties at the commencement of
the litigation, PG&E has notified San Joaquin that it may make a FERC filing
seeking damages from San Joaquin and decertification of its status as a
qualifying facility under the federal standards. Under FERC precedent, if the
San Joaquin facility were found not to have been a qualifying facility, San
Joaquin could be required to refund to PG&E payments it received pursuant to the
Power Purchase Agreement in excess of PG&E's short-term energy costs during the
period of non-compliance, plus interest. In the event the court or FERC were to
determine that San Joaquin is liable to PG&E under the Gas Transportation
Agreement or Power Purchase Agreement due to LOF's failure to use sufficient
quantities of steam, San Joaquin will seek to recover such amounts from LOF
under the terms of the Steam Purchase Agreement between San Joaquin and LOF. The
parties have been actively engaged in settlement discussions, which resulted in
the execution of a Termination and Settlement Agreement between PG&E and the
Dynegy Defendants on March 9, 1999 (the "Settlement Agreement"). The Settlement
Agreement provides for, upon the receipt of CPUC approval, a dismissal with
prejudice of PG&E's claims against the Dynegy Defendants, a release by PG&E of
all claims relative to FERC matters and a termination of the San Joaquin power
purchase agreement as of December 31, 1999, whereupon the San Joaquin facility
will continue to operate as a merchant plant. The Dynegy Defendants will seek to
recover from LOF any losses resulting from the settlement with PG&E. However, if
the settlement is not ultimately concluded, the Dynegy Defendants will seek to
recover from LOF any losses or amounts for which it may be found liable.
Further, the Company's subsidiaries intend to continue to vigorously defend this
action. In the opinion of management, the ultimate resolution of this lawsuit
will not have a material adverse effect on the Company's financial position or
results of operations.
20
On March 24, 1995, Southern California Gas Company ("SOCAL") filed a
lawsuit in the Superior Court of the State of California for the County of Los
Angeles, against Destec, Destec Holdings and Destec Gas Services, Inc. (now
known respectively as Dynegy Power Corp., Dynegy Holdings, Inc. and Dynegy Gas
Services, Inc.), wholly-owned direct and indirect subsidiaries of the Company
(collectively, the "Defendants"), as well as against Chalk Cliff Limited and
McKittrick Limited (collectively, the "Partnerships"). The Company owns an
indirect 50 percent limited partnership interest in McKittrick Limited, and
Chalk Cliff Limited is now wholly owned by subsidiaries of the Company through
the purchase of the interests of Dominion Energy, Inc. All general partners of
the Partnerships are also named defendants. The lawsuit alleged breach of
contract against the Partnerships and their respective general partners, and
interference and conspiracy to interfere with contracts against the Defendants.
The breach of contract claims arose out of the "transport-or-pay" provisions of
the gas transportation service agreements between the Partnerships and SOCAL.
SOCAL sought damages from the Partnerships for past damages and anticipatory
breach damages in an amount equal to approximately $31,000,000. On October 24,
1997, the Court granted SOCAL's Motion for Summary Judgment relating to the
breach of contract causes of action against the Partnerships and their
respective general partners, and requested that SOCAL submit a proposed order
consistent with that ruling for the Court's signature. On November 21, 1997, the
Partnerships filed for voluntary Chapter 11 bankruptcy protection in the Eastern
District of California. Normal business operations by the Partnerships continued
throughout the course of these reorganization proceedings. On January 12, 1998,
the Court entered a Final Order that (a) severed out the Partnerships due to
their Chapter 11 bankruptcy filings, (b) included a finding of contract
liability against the Defendants, (c) dismissed the tortious interference claims
against the Defendants, and (d) assessed damages in an aggregate amount of
approximately $31,000,000. On the same day, the Defendants filed their Notice of
Appeal, and posted a security bond with the Second Appellate District in Los
Angeles based on the lack of allegations made or proven by SOCAL which support
holding those entities liable in contract. On March 11, 1998, the Partnerships
and their respective general partners filed Notices of Appeal with respect to
certain findings of fact in the Court's January 12, 1998 Final Order that were
adverse to those defendants. On or about April 15, 1998, the Court entered a
final judgment against the Partnerships themselves in recognition of the lifting
of the automatic stay against those entities by the Bankruptcy Court. The
Partnerships filed their appeal of that final judgment on June 4, 1998. On
October 21, 1998, the Bankruptcy Court dismissed the voluntary bankruptcy
filings of the Partnerships and their respective lenders thereafter notified
each of the Partnerships of the occurrences of an Event of Default under the
Partnerships' respective credit agreements due to the existence of the SOCAL
judgment against them, and have instituted foreclosure proceedings as to the
projects. Additionally, receivers were named by the lenders and approved by the
Court for each of the projects. In early December 1998, the defendants filed
their opening appellate briefs in the appeal of the Court's final judgment. On
February 23, 1999, the Court granted a motion by SOCAL to amend the Court's
final judgment to include a finding that Dynegy Power Corp. is the alter ego of
the Partnerships and their respective general partners. Dynegy Power Corp. will
appeal the Court's ruling, and will vigorously defend SOCAL's claims.
The PG&E and SOCAL litigations represent pre-acquisition contingencies
acquired by the Company in the Destec Acquisition. In a related matter, Chalk
Cliff and San Joaquin have each guaranteed the obligations of the other
partnership, represented by the project financing loans used to construct the
power generation facilities owned by the respective Partnerships. In the
opinion of management, the election by the lender of its option under the terms
of such arrangements would not have a material adverse effect on the Company's
financial position or results of operations.
On August 3, 1998, Modesto Irrigation District ("MID") filed a lawsuit
against PG&E and Destec in federal court for the Northern District of
California, San Francisco division. The lawsuit alleges violation of federal
and state antitrust laws and breach of contract against Destec. The allegations
are related to a power sale and purchase arrangement in the city of Pittsburg,
CA. MID seeks actual damages from PG&E and Destec in amounts not less than $25
million. MID also seeks a trebling of any portion of damages related to its
antitrust claims. By order dated February 2, 1999, the federal District Court
dismissed MID's state and federal antitrust claims against PG&E and Destec;
however, the Court granted MID leave of thirty days to amend its complaint to
state an antitrust cause of action. On March 3, 1999, MID filed an amended
complaint recasting its federal and state antitrust claims against PG&E and
Destec and restating its breach of contract claim against Destec. Dynegy
believes the allegations made by MID are meritless and will continue to
vigorously defend MID's claims. In the opinion of management, the amount of
ultimate liability with respect to these actions will not have a material
adverse effect on the financial position or results of operations of the
Company.
The Company assumed liability for various claims and litigation in
connection with the Chevron Combination, the Trident Combination, the Destec
Acquisition and in connection with the acquisition of certain gas processing and
gathering facilities from Mesa Operating Limited Partnership. The Company
believes, based on its review of these matters and consultation with outside
legal counsel, that the ultimate resolution of such items will not have a
material adverse effect on the Company's financial position or results of
operations. Further, the Company is subject to various legal proceedings and
claims, which arise in the normal course of business. In the opinion of
management, the amount of ultimate liability with
21
respect to these actions will not have a material adverse effect on the
financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's $0.01 par value common stock ("Common Stock") is listed and
traded on the New York Stock Exchange under the ticker symbol "DYN". The number
of stockholders of record of the Common Stock as of March 24, 1999, was 290.
The following table sets forth the high and low closing prices for
transactions involving the Company's Common Stock for each calendar quarter, as
reported on the New York Stock Exchange Composite Tape and related dividends
paid per common share during such periods.
Summary of Dynegy's Common Stock Price and Dividend Payments
High Low Dividend
------------------------------------------
1998:
Fourth Quarter $15.250 $10.250 $0.0125
Third Quarter 14.063 9.563 0.0125
Second Quarter 15.375 12.500 0.0125
First Quarter 17.250 14.625 0.0125
1997:
Fourth Quarter $19.875 $16.000 $0.0125
Third Quarter 17.750 14.875 0.0125
Second Quarter 19.625 15.500 0.0125
First Quarter 24.000 15.375 0.0125
=========================================================================
The holders of the Common Stock are entitled to receive dividends if, when
and as declared by the Board of Directors of the Company out of funds legally
available therefor. Consistent with the Board of Directors' intent to establish
a policy of declaring quarterly cash dividends, a cash dividend of $0.0125 per
share was declared and paid in each quarter during 1998 and 1997. The holders of
the Series A Preferred Stock are entitled to receive dividends or distributions
equal per share in amount and kind to any dividend or distribution payable on
shares of the Company's common stock, when and as the same are declared by the
Company's Board of Directors. Accordingly, the Company also paid quarterly cash
dividends on its Series A Participating Preferred Stock of $0.0125 per share, or
$0.05 per share on an annual basis.
22
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information presented below was derived from, and is
qualified by reference to, the Consolidated Financial Statements of the Company,
including the Notes thereto, contained elsewhere herein. The selected financial
information should be read in conjunction with the Consolidated Financial
Statements and related Notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
DYNEGY'S SELECTED FINANCIAL DATA
Year Ended December 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------
($ in thousands, except per share data)
STATEMENT OF OPERATIONS DATA (1) :
Revenues $14,257,997 $13,378,380 $7,260,202 $3,665,946 $3,237,843
Operating margin 428,687 385,294 369,500 194,660 99,126
General and administrative expenses 185,708 149,344 100,032 68,057 47,817
Depreciation and amortization expense 113,202 104,391 71,676 44,913 8,378
Asset impairment, abandonment
Severance and other charges 9,644 275,000 --- --- ---
Net income (loss) (3) $ 108,353 $ (102,485) $ 113,322 $ 92,705 $ 42,101
Earnings (loss) per share (4) $0.66 $(0.68) $0.83 $0.82 n/a
Pro forma earnings per share (4) n/a n/a n/a $0.40 $0.28
Shares outstanding 164,605 150,653 136,099 113,176 97,804
CASH FLOW DATA:
Cash flows from operating activities $ 250,780 $ 278,589 $ (30,954) $ 90,648 $ 17,170
Cash flows from investment activities (295,082) (510,735) (111,140) (310,623) (38,376)
Cash flows from financing activities 49,622 204,984 176,037 221,022 18,959
OTHER FINANCIAL DATA:
EBITDA (5) $ 363,517 $ 291,899 $ 289,023 $ 142,538 $ 57,716
Dividends or distributions to partners, net 7,988 7,925 6,740 9,253 14,041
Capital expenditures, acquisitions
And investments (6) 478,464 1,034,026 859,047 979,603 47,014
=================================================================================================================================
December 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------
($ in thousands)
BALANCE SHEET DATA (2) :
Current assets $ 2,117,241 $ 2,018,780 $1,936,721 $ 762,939 $ 445,782
Current liabilities 2,026,323 1,753,094 1,548,987 705,674 404,144
Property and equipment, net 1,932,107 1,521,576 1,691,379 948,511 114,062
Total assets 5,264,237 4,516,903 4,186,810 1,875,252 645,471
Long-term debt 1,046,890 1,002,054 988,597 522,764 33,000
Total equity 1,128,063 1,019,125 1,116,733 552,380 152,213
=================================================================================================================================
(1) The Destec Acquisition was accounted for as an acquisition of a business in
accordance with the purchase method of accounting and the results of
operations attributed to the acquired business are included in the
Company's financial statements and operating statistics effective July 1,
1997. The Chevron Combination was accounted for as an acquisition of
assets under the purchase method of accounting and the results of
operations attributed to the acquired assets are included in the Company's
financial statements and operating statistics effective September 1, 1996.
The Trident Combination was accounted for as an acquisition of a business
in accordance with the purchase method of accounting and the results of
operations attributed to the acquired business are included in the
Company's financial statements and operating statistics effective March 1,
1995.
(2) The Destec Acquisition and the Chevron and Trident Combinations were each
accounted for under the purchase method of accounting. Accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values as of the effective dates of each
transaction. The effective dates of the Destec Acquisition, Chevron
Combination and Trident Combination were June 30, 1997, September 1, 1996
and March 1, 1995, respectively.
(3) Net income (loss) does not include a provision for federal income taxes,
other than minimal amounts on the taxable income of Clearinghouse's
corporate subsidiaries, for the year ended December 31, 1994.
(4) Earnings (loss) per share are computed in accordance with provisions of
Statement of Financial Accounting Standard No. 128, "Earnings Per Share",
for each of the years ended December 31, 1998, 1997, 1996 and 1995,
respectively. Pro forma earnings per share for each of the years ended
December 31,
23
1995 and 1994, respectively, are based on reported net income for the
period adjusted for the incremental statutory federal and state income
taxes that would have been provided had Clearinghouse been a taxpaying
entity prior to the Trident Combination. The pro forma earnings per share
computation for the year ended December 31, 1995, eliminates the effect of
a one-time $45.7 million income tax benefit associated with the Trident
Combination. The weighted average shares outstanding for the year ended
December 31, 1995, is based on the weighted average number of common shares
outstanding plus the common stock equivalents that would arise from the
exercise of outstanding options or warrants, when dilutive. Pro forma
weighted average shares outstanding of 97.8 million shares for the year
ended December 31, 1994, gives effect to the terms of the Trident
Combination and the common stock equivalent shares outstanding as of the
effective date of the Trident Combination assuming a common stock market
price of $12 in all periods.
(5) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is presented as a measure of the Company's ability to service its debt and
to make capital expenditures. It is not a measure of operating results and
is not presented in the Consol