A combination of Dominion Resources and CNG would form thenation’s fourth largest electric and gas utility, serving nearly 4million retail customers in five states. Market capitalization ofthe combined entity will exceed $25 billion-consisting of about$14.5 billion in equity, $9.5 billion in debt and minorityinterests, and $1.1 billion in preferred stock.

Under the terms of the merger agreement approved by eachcompany’s board, DRI will acquire all shares of CNG. Each commonshare of CNG will be converted into 1.52 shares of DRI. Based upon DRI’s closing Friday, Feb. 19. This represents a premium of 25.3%over the average closing price of CNG shares during the 20 tradingdays ended Feb. 19. DRI will issue about $6.3 billion in stock toCNG stockholders. CNG stockholders will own about 43% of thecombined company. The combination is expected to become accretiveto earnings per share by the end of the second year after closing.

When completed, the deal will create a fully integrated electricand gas company in the United States with about $8.8 billion inrevenues, $23.9 billion in assets, annual cash flow in excess of $2billion, and 17,000 employees. The combined company will have anenergy portfolio of more than 20,000 megawatts of power generation,2.4 Tcfe in gas and oil reserves producing nearly 300 Bcfe annuallyThe company will operate a major interstate gas pipeline system andthe largest gas storage system in North America. The combinedcompany will rank as the 11th largest independent oil and gasproducer in the United States measured by reserves.

“This is an irresistible combination. It unites two of the mostrespected names in electricity and natural gas and provides us thecritical mass needed for today’s dynamic energy sector,” said Thos.E. Capps, DRI CEO. “Fundamentally, we are bringing togetherhigh-quality assets with excellent, complementary operations thatserve strong, neighboring gas and electric markets.

“The company will be able to offer a complete line of energyproducts as the $300 billion gas and electric industries continueto converge. The energy industry is changing. Utility deregulation,competition and fuel convergence are rapidly sweeping across thenation. Our combined company will have the scale, scope and skillsto be successful in the competitive energy marketplace. We arecreating a formidable platform for growth in a region that is hometo 40% of the nation’s demand for energy.”

“It’s a natural fit for our shareholders, customers andemployees,” said George A. Davidson Jr., CNG CEO. “Shareholderswill benefit from the earnings growth created by a larger,strategically positioned company with a track record of financialstrength. Customers will benefit from a strong, new competitoraggressively pursuing gas and electric retail markets. And ouremployees will share in opportunities created by one of thenation’s largest and best positioned energy companies.”

“I think if you’re an electric guy you look around at theoptions that you have. and you say this makes a pretty smart fit,”said Merrill Lynch analyst Donato Eassey. He said he thinks theprices paid in gas-power convergence deals will continue to climband noted the regulated assets being acquired in this deal can’t bereplicated at any price, so “to talk about a price to book [value]is almost irrelevant.”

In a research note issued Monday, PaineWebber said, “Given ourcontinued belief that the natural gas and electricity industrieswill continue to converge (and likely at a faster pace giventoday’s announcements), we continue to recommend accumulatingpositions in various names which have solid fundamentals, aretrading at historically low valuations and have highly attractiveasset portfolios ripe for acquisition.” The names include El PasoEnergy, Columbia Energy, The Coastal Corp., and Washington GasLight Co. Last week, a PaineWebber research note on CNG gave thecompany an attractive rating and presciently noted its potential tobe acquired in the ongoing gas-power convergence.

And, the companies expect to realize cost savings from theelimination of duplicate corporate and administrative programs.Because the combination is based on growth, the companies expectminimal work force reductions. The company will use a combinationof growth, reduced hiring and attrition to minimize the need foremployee separations. All union contracts will be honored.

Capps will be president and CEO of the combined company, andDavidson will serve as chairman until his retirement in August2000. The board of directors will have 17 members, ten of whom willbe designated by DRI and seven of whom will be designated by CNG.The combined company will be named Dominion Resources and beheadquartered in Richmond. The gas distribution, pipeline andstorage operations will continue to be headquartered in Pittsburgh.The combined company will also maintain significant operationcenters in New Orleans, LA, and Norfolk, VA, as well as in Ohio andWest Virginia. The companies anticipate regulatory procedures canbe completed in about 12 months.

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