FERC last Wednesday conditionally approved a proposal under which Dynegy Inc. will sell its regulated utility Illinois Power Co. (IP) to Ameren Corp. for $2.3 billion.

The deal includes all of IP’s stock and Dynegy’s 20% interest in a 1,086 MW coal-fired Joppa, IL power generation facility that Ameren now operates with a 60% stake.

A FERC staff member noted that the applicants proposed a 125 MW capacity sale from the Joppa facility. “In order to mitigate the harm to competition resulting from Ameren’s increase in control of that facility applicants have committed not to sell the capacity to two affiliates in the Ameren family — AmerenUE and AmerenCIPS.” FERC, in its decision, said that the capacity also must not be sold to the remaining Ameren affiliate, IP.

The order also accepts for filing a set of power purchase agreements between Dynegy and IP under Section 205 of the Federal Power Act under which Dynegy will sell capacity and energy to IP in 2005 and 2006 in order to meet IP’s retail native load obligation. Dynegy will retain operational control of the generating capacity.

With its July 28 order, the FERC approved a power supply contract for the annual purchase by IP of up to 2,800 MW of electricity from a subsidiary of Dynegy. That power supply contract would extend through 2006 and is expected to supply about 70% of IP’s electric customer requirements

In addition, the Commission determined that IP’s transfer of functional control of its transmission facilities to the Midwest Independent Transmission System Operator (MISO) will not adversely affect competition, rates or regulation and satisfies the requirements of MISO’s tariff.

“I’m pleased to have the merger commitment for Illinois Power to join the Midwest ISO be an item that will happen prior to the closing of the merger and I hope that sends a pretty strong signal outside of this case,” FERC Chairman Patrick Wood noted.

“I did want to call attention to the Commission’s analysis of the buyback contract between Dynegy and Illinois Power for a short period of time,” Wood said. “I think it is absolutely prudent in the context of a large merger for there to be provisions for a short transition period of some stability. There’s enough other things going on when two companies integrate to have to worry about procurement issues right away…that’s the kind of common sense approach that we have to take to mergers here.”

In terms of competitive impacts, the Commission found that Dynegy will remain as a viable competitor in the region during the term of the power purchase agreements and beyond 2006 when Illinois moves to retail choice. Dynegy competes with other suppliers to serve retail customers, as well as wholesale customers in the region.

“The FERC’s approval represents significant progress in Dynegy’s plan to sell Illinois Power to Ameren, as well as in our efforts to reduce debt and solidify the company’s position in unregulated power generation and natural gas liquids businesses where we believe we have competitive advantages,” said Bruce Williamson, CEO of Dynegy. “We appreciate the FERC’s diligence, thoughtful consideration and decision to allow us to move forward on this transaction.”

Williamson added that the transaction between Dynegy and Ameren, which is currently being reviewed by the Illinois Commerce Commission, the Securities and Exchange Commission and other governmental agencies, remains on schedule to close in the fourth quarter. “Our focus is on cooperating fully with the ICC and our government stakeholders, while continuing to offer a strong level of service to Illinois Power’s customers. This commitment extends to operating our Illinois Power assets in a safe, reliable and cost-efficient manner,” Williamson said.

IP, headquartered in Decatur, IL, owns 40,000 miles of electric transmission and distribution lines, more than 750 miles of natural gas transmission pipe and 7,600 miles of natural gas distribution lines. It serves 590,000 electricity customers and 415,000 natural gas customers across northern, central and southern Illinois.

IP will become an Ameren subsidiary, operating as AmerenIP, and will continue to be headquartered in Decatur. Ameren currently serves more than 970,000 electric and natural gas customers; the IP transaction will give it two million Illinois customers. With the acquisition, more than 60% of Ameren’s total customer base will reside in Illinois.

When the deal was first announced in February, Dynegy said that it intended to use the net cash proceeds from the transaction to reduce debt. Assuming a fourth quarter 2004 closing, the sale is expected to improve Dynegy’s liquidity position and be dilutive to earnings beginning in 2005.

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