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Dynegy, Illinova Announce $2 Billion Merger Deal

Dynegy, Illinova Announce $2 Billion Merger Deal

The merger bandwagon continued Monday with the announcement of a $2 billion deal that would bring together Illinois-headquartered Illinova Corp., which has a strong Midwest power generation base and a developing national energy services business, with Houston-based Dynegy Inc., a leading marketer of energy products and services. The merged company would be called Dynegy.

"While our combined company will be larger in scale, the primary benefit of this merger results from the scope and skills we will have to effectively compete in the national energy marketplace," said Dynegy Chairman and CEO Chuck Watson, who will hold the same title at the new company.

Ed Tirello, an analyst with Deutsche Banc Alex. Brown, said he likes the deal. Although Illinova doesn't have much in the way of growth opportunities, it is a stable utility. Dynegy, which has a much higher growth rate of 20% to 25%, gets a "nice" retail base in the middle of the country and a good transmission grid in return, he noted.

Charles Bayless, chairman, president and CEO of Illinova, will be a non-executive director of the new company. "Since forming our holding company in 1994, we have worked to develop national and international capabilities in the unregulated energy industry through Illinova Generating and Illinova Energy Partners."

Both companies are independent power developers and producers. The combined company is expected to own more than 15,000 gross megawatts of domestic generating capacity representing the nation's most geographically diverse generating asset portfolio. Illinova has filed with regulators to transfer its generating assets to an unregulated subsidiary. Illinova's gas and electric utility subsidiary serves 650,000 customers, and Dynegy is the largest marketer of gas liquids in the United States.

"This merger advances our strategic plan through the addition of strategically located generation assets, which will enable Dynegy to enhance its position as one of the nation's leading energy merchants," Watson said. "The combined company will have control over the assets needed to compete across nearly the entire energy value chain - from generation, to delivery, to wholesale and retail marketing and trading."

The new company is expected to generate about 70% of its earnings and cash flow from non-regulated activities, based on estimated results for 2000. The contribution from non-regulated activities is expected to grow as the new company invests in new generation assets as part of a capital expenditure program of about $1 billion per year over the next five years.

The companies intend to use Dynegy's marketing, trading and risk management capabilities to integrate Illinova's physical generation assets in the Midwest with a multi-regional supply perspective. Earnings from the regulated transmission and distribution business are expected to provide a stable platform from which to pursue strategic growth opportunities.

The companies anticipate the elimination of about 5% of the combined 6,500-person work force over time and will seek to minimize work-force effects of the merger through reduced hiring, attrition, voluntary separation programs and other measures.

The new company will adopt an initial annual dividend of 60 cents/share. Illinova shareholders who stick around will see their dividend cut by more than 50% as the deal with Dynegy transforms their company from an income to a growth investment.

Annual pre-tax revenue enhancements and cost savings between $125 million and $165 million are expected. About two-thirds of synergies are attributable to revenue enhancement related to Illinova's generation assets, and one-third is attributable to cost savings related to staff cuts and elimination of duplicate corporate programs. The merger is expected to be accretive to the earnings of both shareholder groups in the first year.

The boards of each company approved the deal, which is supported by Dynegy's industrial shareholders, who hold 76% of the outstanding stock. The merger would create a parent company to acquire all Dynegy and Illinova shares for a combination of stock and cash. About 60% of the consideration received by Dynegy's shareholders will be stock. Dynegy shareholders may elect to exchange each Dynegy share for 0.69 share of the new company, based on a fixed exchange ratio, or elect to receive $16.50 per share in cash consideration, subject to proration. In aggregate, the cash portion of the consideration will be about $1.06 billion. Illinova shareholders will exchange their shares on a share-for-share basis. Following the transaction, Dynegy's shareholders will own slightly more than 50% of the new company. The combination will be accounted for as a purchase of Illinova by Dynegy.

Chevron USA, which owns a 29% interest in Dynegy, voted in favor of the merger and has elected to take all stock. Chevron also will invest $200 million of new equity capital in the combined company and up to an additional $40 million, subject to terms and conditions. "We are pleased to be taking another major step forward in our strategic relationship with Dynegy," said Peter Robertson, a Chevron vice president and member of the Dynegy board of directors. "This additional move into the energy convergence business represents an exciting earnings growth opportunity for Chevron."

NOVA Chemicals and BG, which each currently owns about 24% of Dynegy, agreed to vote in favor of the merger and have elected to receive all cash in the transaction, subject to proration based on the cash election of Dynegy's public shareholders. BG and NOVA Chemicals have also agreed to hold their remaining ownership interest in the combined company in the form of new convertible preferred stock, which is expected to represent no more than about 25% of their current holdings.

The merger, expected to close by the end of the first quarter 2000, is conditioned, among other things, upon the completion of the pending sale of Illinova's Clinton Power Station, approvals of the Federal Energy Regulatory Commission, the Securities and Exchange Commission, the Illinois Commerce Commission, Illinova's common stockholders and the expiration or termination of the Hart-Scott-Rodino waiting period.

Dynegy shares closed down 7/16 at 18 ¬ Monday, and Illinova closed up 5/16 at 25 5/8. Duff & Phelps Credit Rating placed ratings of Illinois Power on rating watch, up, and Moody's Investors Service affirmed its ratings of Dynegy and Illinova, as well as Illinois Power and said the ratings outlook is negative for all three.

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