The shape of Dynegy changed significantly last week with thecompletion of the company’s merger with Illinova and the unloadingof some major Midcontinent gathering and processing assets

The new Dynegy formed by the merger has market capitalizationexceeding $10 billion. The company has interests in power plantswith more than 14,000 MW of domestic generating capacity, averageworldwide gas sales of more than 10 Bcf/d and more than 1.4 millionretail customers. The combined company has more than $12 billion inassets and $22 billion in projected annual revenues from energyoperations throughout North America and Europe.

Management said it expects about 550 employees, 10% of theworkforce of the combined company, to lose their jobs. Almost allof these job cuts, 450 to 500, are expected to be on the Illinovaside. The merger is expected to lead to revenue enhancements andcost savings of between $125 and $165 million, about two-thirds ofwhich will come as revenue enhancements from optimizing Illinova’sexisting generation assets.

Dynegy said it will increase the marketing of Illinova’s 3,800MW of midwestern generation capacity in excess of local marketrequirements and will identify opportunities to expand thecompany’s marketing and trading operations. About 70% of earningsand cash flow are expected to come from non-regulated activitiesthis year, a level expected to increase as the company invests innew generation assets as part of a $5 billion corporate capitalexpenditure program over the next five years.

“Fundamentally, this merger builds a combined company that isone of the few energy industry players with flexible, national,multi-market resources in marketing and trading, power generationand retail outreach,” Dynegy CEO Chuck Watson said last week in aconference call. “This transaction has unified these combinedcapabilities at an accelerated pace. Financially, the merger isstrongly accretive in the first year and each year thereafter.Immediate synergies, totaling between $125 million and $165million, will be realized. Two-thirds of the synergies andoperating efficiencies are attributed to revenue opportunitiesrelating to Illinova’s existing portfolio of generation assets.While approximately one-third are attributable to staff reductionsand operating efficiencies, elimination of duplicative corporateprograms and activities and lower capital cost.

“Our objective to own or control 70,000 MW of capacity withinthe next four years remains well on course. We are currentlyworking on seven new generation projects in six states. Eachproject represents nearly 3,000 MW of additional generatingcapacity.” Three of the projects, in North Carolina, Louisiana andIllinois, will be in service before the peak summer season thisyear. “The other four projects, located in Kentucky, Florida,Arizona and Georgia, are all moving forward on schedule.”

Chevron recently invested an additional $200 million in the newDynegy, resulting in a 28% stake, about equal to the company’sposition in Dynegy before the Illinova merger. As part of Chevron’sinterest in Dynegy, it will retain three positions on the mergedcompany’s board of directors. Chevron’s participation in Dynegydates back to 1996 when it combined its gas and liquids businesseswith then NGC Corp., Dynegy’s predecessor. The resulting companywas re-named Dynegy Inc. in June 1998 to recognize its evolutionfrom a gas marketer to a company with a range of energy productsand services.

The Midcontinent assets – whose sale was announced one daybefore Dynegy announced the merger completion – went for $307.7million to Oneok. The deal is intended to streamline Dynegy’smidstream operations. The move will leave Dynegy’s midstream assetsfocused on several core regions and will help reduce its new equityoffering by several million dollars.

The assets include eight gas processing plants, interests in twoother plants and 7,000 miles of gathering and intrastate pipelinesin Oklahoma, Kansas and the Texas Panhandle. Current throughput is240 MMcf/d with 375 MMcf/d of total capacity. Gas liquidsproduction averages 25,000 barrels per day. Closing of the deal isexpected by the end of this quarter.

Watson said the sale is “consistent with our goal to concentrateour capital investments in natural gas processing in our corePermian and Fort Worth Basins and Gulf Coast strategic areas.Second, sales of less strategic assets from across the company,which are expected to exceed $600 million by the end of firstquarter 2000, will allow us to reduce the expected size of a newequity offering, to about $250 million, from a range of $400 to$500 million, as originally contemplated at the time the proposedmerger between Dynegy and Illinova was announced. Finally, by doingso, we will achieve our balance sheet objective and coverageratios, thereby preserving and enhancing our credit ratings andavoiding unnecessary dilution of shareholders’ ownershipinterests.”

PaineWebber analyst James Yannello said the asset sale is”center fairway with Dynegy’s goal of reducing its overall upstreamcommodity price exposure (through portfolio restructuring, hedgesand assets sales). At the same time, it furthers its strategy offocusing its midstream operations on a few key geographicregions… while allowing it to focus more on the downstreammarketing side of the business, where it already is the leader.Expecting this asset disposition to be fairly earnings neutral, ourprojection of the new Dynegy’s 2000 earnings remains at$2.20/share.”

For Oneok, the transaction brings in a significant collection ofassets near its core operations in the Midcontinent. David Kyle,Oneok president and COO, said it is “an excellent complement” toOneok’s existing assets. “We expect this transaction to beaccretive to earnings the first year.”

Joe Fisher, Houston: Rocco Canonica

©Copyright 2000 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.