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                                                                    EXHIBIT 10.7

                                   DYNEGY INC.

                          2000 LONG TERM INCENTIVE PLAN

I. PURPOSE

     The purpose of the DYNEGY INC. 2000 LONG TERM INCENTIVE PLAN (the "Plan")
is to provide a means through which Energy Convergence Holding Company (to be
renamed Dynegy Inc.), an Illinois corporation (the "Company"), and its
subsidiaries may attract able persons to enter the employ of the Company and its
affiliates and to provide a means whereby those individuals upon whom the
responsibilities of the successful administration and management of the Company
and its affiliates rest, and whose present and potential contributions to the
welfare of the Company and its affiliates are of importance, can acquire and
maintain stock ownership, thereby strengthening their concern for the welfare of
the Company and its affiliates.

     A further purpose of the Plan is to provide such individuals with
additional incentive and reward opportunities designed to enhance the profitable
growth of the Company and its affiliates. Accordingly, the Plan provides for
granting Incentive Stock Options, options that do not constitute Incentive Stock
Options, Restricted Stock Awards, Performance Awards, and Phantom Stock Awards,
or any combination of the foregoing, as is best suited to the circumstances of
the particular employee as provided herein.

II. DEFINITIONS

     The following definitions shall be applicable throughout the Plan unless
specifically modified by any paragraph:

     "Affiliate" means any corporation, partnership, limited liability company
or partnership, association, trust or other organization which, directly or
indirectly, controls, is controlled by, or is under common control with, the
Company. For purposes of the preceding sentence, "control" (including, with
correlative meanings, the terms "controlled by" and "under common control
with"), as used with respect to any entity or organization, shall mean the
possession, directly or indirectly, of the power (i) to vote more than 50% of
the securities having ordinary voting power for the election of directors of the
controlled entity or organization, or (ii) to direct or cause the direction of
the management and policies of the controlled entity or organization, whether
through the ownership of voting securities or by contract or otherwise.

     "Award" means, individually or collectively, any Option, Restricted Stock
Award, Performance Award or Phantom Stock Award.

     "Board" means the Board of Directors of the Company.

     "Code" means the Internal Revenue Code of 1986, as amended. Reference in
the Plan to any section of the Code shall be deemed to include any amendments or
successor provisions to such section and any regulations under such section.

     "Committee" means a committee of the Board that is selected by the Board as
provided in Paragraph IV(a).

     "Common Stock" means the Class A common stock, no par value per share, of
the Company, or any security into which such common stock may be changed by
reason of any transaction or event of the type described in Paragraph XI.

     "Company" means Energy Convergence Holding Company, an Illinois
corporation.

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     "Director" means an individual elected to the Board by the stockholders of
the Company or by the Board under applicable corporate law who is serving on the
Board on the date the Plan is adopted by the Board or is elected to the Board
after such date.

     An "employee" means any person (including a Director) in an employment
relationship with the Company or any Affiliate.

     "Fair Market Value" means, as of any specified date, the closing sales
price of the Common Stock reported on the stock exchange composite tape on that
date, or, if no prices are reported on that date, on the last preceding date on
which such prices of the Common Stock are so reported. In the event Common Stock
is not publicly traded at the time a determination of its value is required to
be made hereunder, the determination of its fair market value shall be made by
the Committee in such manner as it deems appropriate.

     "Holder" means an employee who has been granted an Award.

     "Incentive Stock Option" means an incentive stock option within the meaning
of section 422 of the Code.

     "Non-Employee Director" means a Director who is not employed by the Company
or any of its subsidiaries;.

     "1934 Act" means the Securities Exchange Act of 1934, as amended.

     "Option" means an Award granted under Paragraph VII of the Plan and
includes both Incentive Stock Options to purchase Common Stock and Options that
do not constitute Incentive Stock Options to purchase Common Stock.

     "Option Agreement" means a written agreement between the Company and a
Holder with respect to an Option.

     "Performance Award" means an Award granted under Paragraph IX of the Plan.

     "Performance Award Agreement" means a written agreement between the Company
and a Holder with respect to a Performance Award.

     "Phantom Stock Award" means an Award granted under Paragraph X of the Plan.

     "Phantom Stock Award Agreement" means a written agreement between the
Company and a Holder with respect to a Phantom Stock Award.

     "Plan" means the Dynegy Inc. 2000 Long Term Incentive Plan, as amended from
time to time.

     "Restricted Stock Agreement" means a written agreement between the Company
and a Holder with respect to a Restricted Stock Award.

     "Restricted Stock Award" means an Award granted under Paragraph VIII of the
Plan.

     "Rule 16b-3" means SEC Rule 16b-3 promulgated under the 1934 Act, as such
may be amended from time to time, and any successor rule, regulation or statute
fulfilling the same or a similar function.

     "Stock Appreciation Right" shall have the meaning assigned to such term in
Paragraph VII(d) of the Plan.

III. EFFECTIVE DATE AND DURATION OF THE PLAN

     The Plan shall become effective upon the Effective Time under the Agreement
and Plan of Merger dated June 14, 1999, among the Company, Dynegy Inc., Illinova
Corporation, Dynegy Acquisition Corporation and Energy Convergence Acquisition
Corporation (the "Merger Agreement"). Notwithstanding any provision in the Plan,
no Option shall be exercisable and no Award shall vest or become satisfiable
prior to such stockholder approval. No

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further Awards may be granted under the Plan after ten years from the Effective
Time under the Merger Agreement. The Plan shall remain in effect until all
Options granted under the Plan have been exercised or expired, all Restricted
Stock Awards granted under the Plan have vested or been forfeited, and all
Performance Awards and Phantom Stock Awards have been satisfied or expired.

IV. ADMINISTRATION

     (a) Composition of Committee. The Plan shall be administered by a committee
of, and appointed by, the Board, and such committee shall be comprised of two or
more outside Directors (within the meaning of the term "outside directors" as
used in section 162(m) of the Code and applicable interpretive authority
thereunder and within the meaning of "Non-Employee Director" as defined in Rule
16b-3).

     (b) Powers. Subject to the express provisions of the Plan, the Committee
shall have authority, in its sole discretion, to determine which employees shall
receive an Award, the time or times when such Award shall be made, whether an
Incentive Stock Option or nonqualified Option shall be granted, and the number
of shares to be subject to each Option or Restricted Stock Award, the number of
shares subject to or the value of each Performance Award, and the value of each
Phantom Stock Award. In making such determinations, the Committee shall take
into account the nature of the services rendered by the respective employees,
their present and potential contribution to the Company's success and such other
factors as the Committee in its sole discretion shall deem relevant.

     (c) Additional Powers. The Committee shall have such additional powers as
are delegated to it by the other provisions of the Plan. Subject to the express
provisions of the Plan, this shall include the power to construe the Plan and
the respective agreements executed hereunder, to prescribe rules and regulations
relating to the Plan, and to determine the terms, restrictions and provisions of
the agreement relating to each Award, including such terms, restrictions and
provisions as shall be requisite in the judgment of the Committee to cause
designated Options to qualify as Incentive Stock Options, and to make all other
determinations necessary or advisable for administering the Plan. The Committee
may correct any defect or supply any omission or reconcile any inconsistency in
the Plan or in any agreement relating to an Award in the manner and to the
extent it shall deem expedient to carry it into effect. The determinations of
the Committee on the matters referred to in this Paragraph IV shall be
conclusive.

V.   SHARES SUBJECT TO THE PLAN; GRANT OF OPTIONS; GRANT OF RESTRICTED STOCK
     AWARDS

     (a) Shares Subject to the Plan and Award Limits. Subject to adjustment in
the same manner as provided in Paragraph XI with respect to shares of Common
Stock subject to Options then outstanding, the aggregate number of shares of
Common Stock that may be issued under the Plan shall not exceed 5,000,000
shares. Shares shall be deemed to have been issued under the Plan only to the
extent actually issued and delivered pursuant to an Award. To the extent that an
Award lapses or the rights of its Holder terminate, any shares of Common Stock
subject to such Award shall again be available for the grant of an Award under
the Plan. Notwithstanding any provision in the Plan to the contrary, the maximum
number of shares of Common Stock that may be subject to Options, Restricted
Stock Awards (subject to performance forfeiture restrictions described in
Paragraph VIII) and Performance Awards denominated in shares of Common Stock
granted to any one individual during any calendar year may not exceed 1,000,000
shares of Common Stock (subject to adjustment in the same manner as provided in
Paragraph XI with respect to shares of Common Stock subject to Options then
outstanding) and the maximum value of any Performance Award denominated in cash
(including the Fair Market Value of any shares of Common Stock paid in
satisfaction of such Performance Award) granted to any one individual during any
calendar year may not exceed $5,000,000. The limitations set forth in the
preceding sentence shall be applied in a manner which will permit compensation
generated under the Plan to constitute "performance-based" compensation for
purposes of section 162(m) of the Code, including, without limitation, counting
against such maximum number of shares, to the extent required under section
162(m) of the Code and applicable interpretive authority thereunder, any shares
subject to Options that are canceled or repriced.

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     (b) Grant of Awards. The Committee may from time to time grant Awards to
one or more employees determined by it to be eligible for participation in the
Plan in accordance with the terms of the Plan.

     (c) Stock Offered. Subject to the limitations set forth in Paragraph
V(a),the stock to be offered pursuant to the grant of an Award may be authorized
but unissued Common Stock or Common Stock previously issued and outstanding and
reacquired by the Company. Any of such shares which remain unissued and which
are not subject to outstanding Awards at the termination of the Plan shall cease
to be subject to the Plan but, until termination of the Plan, the Company shall
at all times make available a sufficient number of shares to meet the
requirements of the Plan.

VI. ELIGIBILITY

     Awards may be granted only to persons who, at the time of grant, are
employees of the Company and its Affiliates, or Non-Employee Directors. An Award
may be granted on more than one occasion to the same person, and, subject to the
limitations set forth in the Plan, such Award may include an Incentive Stock
Option, an Option that is not an Incentive Stock Option, a Restricted Stock
Award, a Performance Award, a Phantom Stock Award, or any combination thereof.

VII. STOCK OPTIONS

     (a) Option Period. The term of each Option shall be as specified by the
Committee at the date of grant.

     (b) Limitations on Exercise of Option. An Option shall be exercisable in
whole or in such installments and at such times as determined by the Committee.

     (c) Special Limitations on Incentive Stock Options. An Incentive Stock
Option may be granted only to an individual who is employed by the Company or
any parent or subsidiary corporation (as defined in section 424 of the Code) at
the time the Option is granted. To the extent that the aggregate Fair Market
Value (determined at the time the respective Incentive Stock Option is granted)
of Common Stock with respect to which Incentive Stock Options granted after 1986
are exercisable for the first time by an individual during any calendar year
under all incentive stock option plans of the Company and its parent and
subsidiary corporations exceeds $100,000, such Incentive Stock Options shall be
treated as Options which do not constitute Incentive Stock Options. The
Committee shall determine, in accordance with applicable provisions of the Code,
Treasury Regulations and other administrative pronouncements, which of a
Holder's Incentive Stock Options will not constitute Incentive Stock Options
because of such limitation and shall notify the Holder of such determination as
soon as practicable after such determination. No Incentive Stock Option shall be
granted to an individual if, at the time the Option is granted, such individual
owns stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or of its parent or subsidiary corporation,
within the meaning of section 422(b)(6) of the Code, unless (i) at the time such
Option is granted the option price is at least 110% of the Fair Market Value of
the Common Stock subject to the Option and (ii) such Option by its terms is not
exercisable after the expiration of five years from the date of grant. An
Incentive Stock Option shall not be transferable otherwise than by will or the
laws of descent and distribution, and shall be exercisable during the Holder's
lifetime only by such Holder or the Holder's guardian or legal representative.

     (d) Option Agreement. Each Option shall be evidenced by an Option Agreement
in such form and containing such provisions not inconsistent with the provisions
of the Plan as the Committee from time to time shall approve, including, without
limitation, provisions to qualify an Incentive Stock Option under section 422 of
the Code. Each Option Agreement shall specify the effect of termination of
employment on the exercisability of the Option. An Option Agreement may provide
for the payment of the option price, in whole or in part, by the delivery of a
number of shares of Common Stock (plus cash if necessary) having a Fair Market
Value equal to such option price. Moreover, an Option Agreement may provide for
a "cashless exercise" of the Option by establishing procedures satisfactory to
the Committee with respect thereto. Further, an Option Agreement may provide for
the surrender of

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the right to purchase shares under the Option in return for a payment in cash or
shares of Common Stock or a combination of cash and shares of Common Stock equal
in value to the excess of the Fair Market Value of the shares with respect to
which the right to purchase is surrendered over the option price therefor
("Stock Appreciation Rights"), on such terms and conditions as the Committee in
its sole discretion may prescribe. In the case of any such Stock Appreciation
Right that is granted in connection with an Incentive Stock Option, such right
shall be exercisable only when the Fair Market Value of the Common Stock exceeds
the price specified therefor in the Option or the portion thereof to be
surrendered. The terms and conditions of the respective Option Agreements need
not be identical.

     (e) Option Price and Payment. The price at which a share of Common Stock
may be purchased upon exercise of an Option shall be determined by the Committee
but, in the case of Incentive Stock Options only, subject to adjustment as
provided in Paragraph XI shall not be less than the Fair Market Value of a share
of Common Stock on the date such Incentive Stock Option is granted. The Option
or portion thereof may be exercised by delivery of an irrevocable notice of
exercise to the Company, as specified by the Committee. The purchase price of
the Option or portion thereof shall be paid in full in the manner prescribed by
the Committee. Separate stock certificates shall be issued by the Company for
those shares acquired pursuant to the exercise of an Incentive Stock Option and
for those shares acquired pursuant to the exercise of any Option that does not
constitute an Incentive Stock Option.

     (f) Stockholder Rights and Privileges. The Holder shall be entitled to all
the privileges and rights of a stockholder only with respect to such shares of
Common Stock as have been purchased under the Option and for which certificates
of stock have been registered in the Holder's name.

     (g) Options and Rights in Substitution for Stock Options Granted by Other
Corporations. Options and Stock Appreciation Rights may be granted under the
Plan from time to time in substitution for stock options held by individuals
employed by corporations who become employees as a result of a merger or
consolidation or other business combination of the employing corporation with
the Company or any Affiliate.

     (h) Non-Employee Director Option Grants. Upon his or her election or
appointment as a Director, each Non-Employee Director shall receive, without any
further action on the part of the Committee, the award of an Option to purchase
3,000 shares of Common Stock, which Option shall (i) be priced at Fair Market
Value, (ii) vest and become exercisable on the first anniversary of the date of
grant, and (iii) with respect to any unexercised portion thereof, automatically
and without further notice, terminate and become null and void on the tenth
anniversary of the date of grant of such Option or on the third anniversary of
the date such Director's service on the Board terminates. Each Option shall be
evidenced by an Option Agreement. In the event a Director is unable to, or
chooses not to, accept the Award, he or she should decline to execute the Option
Agreement.

VIII. RESTRICTED STOCK AWARDS

     (a) Forfeiture Restrictions To Be Established by the Committee. Shares of
Common Stock that are the subject of a Restricted Stock Award shall be subject
to restrictions on disposition by the Holder and an obligation of the Holder to
forfeit and surrender the shares to the Company under certain circumstances(the
"Forfeiture Restrictions"). The Forfeiture Restrictions shall be determined by
the Committee in its sole discretion, and the Committee may provide that the
Forfeiture Restrictions shall lapse upon

          (i) the attainment of one or more performance measures established by
     the Committee that are based on:

               (1) the price of a share of Common Stock,

               (2) the Company's earnings per share,

               (3) the Company's market share,

               (4) the market share of a business unit of the Company designated
          by the Committee,

               (5) the Company's sales,

               (6) the sales of a business unit of the Company designated by the
          Committee,

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               (7) the net income (before or after taxes) of the Company or any
          business unit of the Company designated by the Committee,

               (8) the cash flow return on investment of the Company or any
          business unit of the Company designated by the Committee,

               (9) the earnings before or after interest, taxes, depreciation,
          and/or amortization of the Company or any business unit of the Company
          designated by the Committee,

               (10) the economic value added,

               (11) the return on stockholders' equity achieved by the Company,
          or

               (12) the total stockholders' return achieved by the Company,

          (ii) the Holder's continued employment with the Company for a
     specified period of time,

          (iii) the occurrence of any event or the satisfaction of any other
     condition specified by the Committee in its sole discretion, or

          (iv) a combination of any of the foregoing. The performance measures
     may be subject to adjustment for specified significant extraordinary items
     or events, and may be absolute, relative to one or more other companies, or
     relative to one or more indexes, and may be contingent upon future
     performance of the Company or any Affiliate, division, or department
     thereof by or in which the Holder is employed during the performance
     period. Each Restricted Stock Award may have different Forfeiture
     Restrictions, in the sole discretion of the Committee.

     (b) Other Terms and Conditions. Common Stock awarded pursuant to a
Restricted Stock Award shall be represented by a stock certificate registered in
the name of the Holder of such Restricted Stock Award. The Holder shall have the
right to receive dividends with respect to Common Stock subject to a Restricted
Stock Award, to vote Common Stock subject thereto and to enjoy all other
stockholder rights, except that

          (i) the Holder shall not be entitled to delivery of the stock
     certificate until the Forfeiture Restrictions have expired,

          (ii) the Company shall retain custody of the stock until the
     Forfeiture Restrictions have expired,

          (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate
     or otherwise dispose of the stock until the Forfeiture Restrictions have
     expired, and (iv) a breach of the terms and conditions established by the
     Committee pursuant to the Restricted Stock Agreement shall cause a
     forfeiture of the Restricted Stock Award. At the time of such Award, the
     Committee may, in its sole discretion, prescribe additional terms,
     conditions or restrictions relating to Restricted Stock Awards, including,
     but not limited to, rules pertaining to the termination of employment (by
     retirement, disability, death or otherwise) of a Holder prior to expiration
     of the Forfeitures Restrictions. Such additional terms, conditions or
     restrictions shall be set forth in a Restricted Stock Agreement made in
     conjunction with the Award.

     (c) Payment for Restricted Stock. The Committee shall determine the amount
and form of any payment for Common Stock received pursuant to a Restricted Stock
Award, provided that in the absence of such a determination, a Holder shall not
be required to make any payment for Common Stock received pursuant to a
Restricted Stock Award, except to the extent otherwise required by law.

     (d) Committee's Discretion to Accelerate Vesting of Restricted Stock
Awards. The Committee may, in its discretion and as of a date determined by the
Committee, fully vest any or all Common Stock awarded to a Holder pursuant to a
Restricted Stock Award and, upon such vesting, all restrictions applicable to
such Restricted Stock Award shall terminate as of such date. Any action by the
Committee pursuant to this Subparagraph may vary among individual Holders and
may vary among the Restricted Stock Awards held by any individual Holder.
Notwithstanding the preceding provisions of this Subparagraph, the Committee may
not take any action described in this Subparagraph with respect to a Restricted
Stock Award that has been granted to a "covered employee" (within the meaning of
Treasury Regulation section 1.162-27(c)(2)) if such Award has been designed to
meet the exception for performance-based compensation under section 162(m) of
the Code.

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     (e) Restricted Stock Agreements. At the time any Award is made under this
Paragraph VIII, the Company and the Holder shall enter into a Restricted Stock
Agreement setting forth each of the matters contemplated hereby and such other
matters as the Committee may determine to be appropriate. The terms and
provisions of the respective Restricted Stock Agreements need not be identical.

IX. PERFORMANCE AWARDS

     (a) Performance Period. The Committee shall establish, with respect to and
at the time of each Performance Award, the number of shares of Common Stock
subject to, or the maximum value of, the Performance Award and the performance
period over which the performance applicable to the Performance Award shall be
measured.

     (b) Performance Measures. A Performance Award shall be awarded to a Holder
contingent upon future performance of the Company or any Affiliate, division, or
department thereof by or in which such Holder is employed during the performance
period. The Committee shall establish the performance measures applicable to
such performance either (I) prior to the beginning of the performance period or
(II) within ninety days after the beginning of the performance period if the
outcome of the performance targets is substantially uncertain at the time such
targets are established, but not later than the date that 25% of the performance
period has elapsed; provided such measures may be made subject to adjustment for
specified significant extraordinary items or events. The performance measures
may be absolute, relative to one or more other companies, or relative to one or
more indexes. The performance measures established by the Committee may be based
upon

          (i) the price of a share of Common Stock,

          (ii) the Company's earnings per share,

          (iii) the Company's market share,

          (iv) the market share of a business unit of the Company designated by
     the Committee,

          (v) the Company's sales,

          (vi) the sales of a business unit of the Company designated by the
     Committee,

          (vii) the net income (before or after taxes) of the Company or any
     business unit of the Company designated by the Committee,

          (viii) the cash flow return on investment of the Company or any
     business unit of the Company designated by the Committee,

          (ix) the earnings before or after interest, taxes, depreciation,
     and/or amortization of the Company or any business unit of the Company
     designated by the Committee,

          (x) the economic value added,

          (xi) the return on stockholders' equity achieved by the Company,

          (xii) the total stockholders' return achieved by the Company, or

          (xiii) a combination of any of the foregoing. The Committee, in its
     sole discretion, may provide for an adjustable Performance Award value
     based upon the level of achievement of performance measures.

     (c) Awards Criteria. In determining the value of Performance Awards, the
Committee shall take into account a Holder's responsibility level, performance,
potential, other Awards, and such other considerations as it deems appropriate.
The Committee, in its sole discretion, may provide for a reduction in the value
of a Holder's Performance Award during the performance period.

     (d) Payment. Following the end of the performance period, the Holder of a
Performance Award shall be entitled to receive payment of an amount not
exceeding the number of shares of Common Stock subject to or the maximum value
of the Performance Award, based on the achievement of the performance measures
for such performance period, as determined by the Committee. Payment of a
Performance Award may be made in cash, Common Stock, or a combination thereof,
as determined by the Committee. Payment shall be made in a lump sum

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or in installments as prescribed by the Committee. If a Performance Award
covering shares of Common Stock is to be paid in cash, such payment shall be
based on the Fair Market Value of the Common Stock on the payment date.

     (e) Termination of Award. A Performance Award shall terminate if the Holder
does not remain continuously in the employ of the Company and its Affiliates at
all times during the applicable performance period, except as may be determined
by the Committee.

     (f) Performance Award Agreements. At the time any Award is made under this
Paragraph IX, the Company and the Holder shall enter into a Performance Award
Agreement setting forth each of the matters contemplated hereby, and such
additional matters as the Committee may determine to be appropriate. The terms
and provisions of the respective Performance Award Agreements need not be
identical.

X. PHANTOM STOCK AWARDS

     (a) Phantom Stock Awards. Phantom Stock Awards are rights to receive shares
of Common Stock (or the Fair Market Value thereof), or rights to receive an
amount equal to any appreciation or increase in the Fair Market Value of Common
Stock over a specified period of time, which vest over a period of time as
established by the Committee, without satisfaction of any performance criteria
or objectives. The Committee may, in its discretion, require payment or other
conditions of the Holder respecting any Phantom Stock Award.

     (b) Award Period. The Committee shall establish, with respect to and at the
time of each Phantom Stock Award, a period over which the Award shall vest with
respect to the Holder.

     (c) Awards Criteria. In determining the value of Phantom Stock Awards, the
Committee shall take into account a Holder's responsibility level, performance,
potential, other Awards, and such other considerations as it deems appropriate.

     (d) Payment. Following the end of the vesting period for a Phantom Stock
Award (or at such other time as the applicable Phantom Stock Award Agreement may
provide), the Holder of a Phantom Stock Award shall be entitled to receive
payment of an amount, not exceeding the maximum value of the Phantom Stock
Award, based on the then vested value of the Award. Payment of a Phantom Stock
Award may be made in cash, Common Stock, or a combination thereof as determined
by the Committee. Payment shall be made in a lump sum or in installments as
prescribed by the Committee. Any payment to be made in cash shall be based on
the Fair Market Value of the Common Stock on the payment date. Cash dividend
equivalents may be paid during or after the vesting period with respect to a
Phantom Stock Award, as determined by the Committee.

     (e) Termination of Award. A Phantom Stock Award shall terminate if the
Holder does not remain continuously in the employ of the Company and its
Affiliates at all times during the applicable vesting period, except as may be
otherwise determined by the Committee.

     (f) Phantom Stock Award Agreements. At the time any Award is made under
this Paragraph X, the Company and the Holder shall enter into a Phantom Stock
Award Agreement setting forth each of the matters contemplated hereby, and such
additional matters as the Committee may determine to be appropriate. The terms
and provisions of the respective Phantom Stock Award Agreements need not be
identical.

XI. RECAPITALIZATION OR REORGANIZATION

     (a) No Effect on Right or Power. The existence of the Plan and the Awards
granted hereunder shall not affect in any way the right or power of the Board or
the stockholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's or any
Affiliate's capital structure or its business, any merger or consolidation of
the Company or any Affiliate, any issue of debt or equity securities ahead of or
affecting Common Stock or the rights thereof, the dissolution or liquidation of
the Company or any Affiliate or any

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sale, lease, exchange or other disposition of all or any part of its assets or
business or any other corporate act or proceeding.

     (b) Subdivision or Consolidation of Shares; Stock Dividends. The shares
with respect to which Awards may be granted are shares of Common Stock as
presently constituted, but if, and whenever, prior to the expiration of an Award
theretofore granted, the Company shall effect a subdivision or consolidation of
shares of Common Stock or the payment of a stock dividend on Common Stock
without receipt of consideration by the Company, the number of shares of Common
Stock with respect to which such Award may thereafter be exercised or satisfied,
as applicable

          (i) in the event of an increase in the number of outstanding shares
     shall be proportionately increased, and the purchase price per share shall
     be proportionately reduced, and

          (ii) in the event of a reduction in the number of outstanding shares
     shall be proportionately reduced, and the purchase price per share shall be
     proportionately increased. Any factional share resulting from such
     adjustment shall be rounded down to the next whole share.

     (c) Recapitalizations and Corporate Changes. If the Company recapitalizes,
reclassifies its capital stock, or otherwise changes its capital structure (a
"recapitalization"), the number and class of shares of Common Stock covered by
an Award theretofore granted shall be adjusted so that such Award shall
thereafter cover the number and class of shares of stock and securities to which
the Holder would have been entitled pursuant to the terms of there
capitalization if, immediately prior to the recapitalization, the Holder had
been the holder of record of the number of shares of Common Stock then covered
by such Award. If (i) the Company shall not be the surviving entity in any
merger or consolidation (or survives only as a subsidiary of an entity), (ii)
the Company sells, leases or exchanges or agrees to sell, lease or exchange all
or substantially all of its assets to any other person or entity, (iii) the
Company is to be dissolved and liquidated, (iv) any person or entity, including
a "group" as contemplated by Section 13(d)(3) of the 1934 Act, acquires or gains
ownership or control (including, without limitation, power to vote) of more than
50% of the outstanding shares of the Company's voting stock (based upon voting
power), or (v) as a result of or in connection with a contested election of
Directors, the persons who were Directors of the Company before such election
shall cease to constitute a majority of the Board (each such event is referred
to herein as a "Corporate Change"), no later than (x) ten days after the
approval by the stockholders of the Company of such merger, consolidation,
reorganization, sale, lease or exchange of assets or dissolution or such
election of Directors or (y) thirty days after a Corporate Change of the type
described in clause (iv), the Committee, acting in its sole discretion without
the consent or approval of any Holder, shall effect one or more of the following
alternatives, which alternatives may vary among individual Holders and which may
vary among Options held by any individual Holder:

          (1) accelerate the time at which Options then outstanding may be
     exercised so that such Options may be exercised in full for a limited
     period of time on or before a specified date (before or after such
     Corporate Change)fixed by the Committee, after which specified date all
     unexercised Options and all rights of Holders thereunder shall terminate,

          (2) require the mandatory surrender to the Company by selected Holders
     of some or all of the outstanding Options held by such Holders
     (irrespective of whether such Options are then exercisable under the
     provisions of the Plan) as of a date, before or after such Corporate
     Change, specified by the Committee, in which event the Committee shall
     thereupon cancel such Options and the Company shall pay (or cause to be
     paid) to each Holder an amount of cash per share equal to the excess, if
     any, of the amount calculated in Subparagraph d below (the "Change of
     Control Value") of the shares subject to such Option over the exercise
     price(s) under such Options for such shares,

          (3) make such adjustments to Options then outstanding as the Committee
     deems appropriate to reflect such Corporate Change (provided, however, that
     the Committee may determine in its sole discretion that no adjustment is
     necessary to Options then outstanding), or

                                      VI-9
<PAGE>   10

          (4) provide that the number and class of shares of Common Stock
     covered by an Option theretofore granted shall be adjusted so that such
     Option shall thereafter cover the number and class of shares of stock or
     other securities or property (including, without limitation, cash) to which
     the Holder would have been entitled pursuant to the terms of the agreement
     of merger, consolidation or sale of assets and dissolution if, immediately
     prior to such merger, consolidation or sale of assets and dissolution, the
     Holder had been the holder of record of the number of shares of Common
     Stock then covered by such Option.

     (d) Change of Control Value. For the purposes of clause (2) in
Subparagraph(c) above, the "Change of Control Value" shall equal the amount
determined in clause (i), (ii) or (iii), whichever is applicable, as follows:

          (i) the per share price offered to stockholders of the Company in any
     such merger, consolidation, sale of assets or dissolution transaction,

          (ii) the price per share offered to stockholders of the Company in any
     tender offer or exchange offer whereby a Corporate Change takes place, or

          (iii) if such Corporate Change occurs other than pursuant to a tender
     or exchange offer, the Fair Market Value per share of the shares into which
     such Options being surrendered are exercisable, as determined by the
     Committee as of the date determined by the Committee to be the date of
     cancellation and surrender of such Options. In the event that the
     consideration offered to stockholders of the Company in any transaction
     described in this Subparagraph (d) or Subparagraph (c) above consists of
     anything other than cash, the Committee shall determine the fair cash
     equivalent of the portion of the consideration offered which is other than
     cash.

     (e) Other Changes in the Common Stock. In the event of changes in the
outstanding Common Stock by reason of recapitalizations, reorganizations,
mergers, consolidations, combinations, split-ups, split-offs, spin-offs,
exchanges or other relevant changes in capitalization or distributions to the
holders of Common Stock occurring after the date of the grant of any Award and
not otherwise provided for by this Paragraph XI, such Award and any agreement
evidencing such Award shall be subject to adjustment by the Committee at its
sole discretion as to the number and price of shares of Common Stock or other
consideration subject to such Award. In the event of any such change in the
outstanding Common Stock or distribution to the holders of Common Stock, the
aggregate number of shares available under the Plan and the maximum number of
shares that may be subject to Awards granted to any one individual may be
appropriately adjusted by the Committee, whose determination shall be
conclusive. Notwithstanding the foregoing, upon the occurrence of a Corporate
Change, the Committee, acting in its sole discretion without the consent or
approval of any Holder, may require the mandatory surrender to the Company by
selected Holders of some or all of the outstanding Performance Awards and
Phantom Stock Awards as of a date, before or after such Corporate Change,
specified by the Committee, in which event the Committee shall there upon cancel
such Performance Awards and Phantom Stock Awards and the Company shall pay (or
cause to be paid) to each Holder an amount of cash equal to the maximum value of
such Performance Award or Phantom Stock Award which, in the event the applicable
performance or vesting period set forth in such Performance Award or Phantom
Stock Award has not been completed, shall be multiplied by a fraction, the
numerator of which is the number of days during the period beginning on the
first day of the applicable performance or vesting period and ending on the date
of the surrender, and the denominator of which is the aggregate number of days
in the applicable performance or vesting period.

     (f) Stockholder Action. Any adjustment provided for in the above
Subparagraphs shall be subject to any required stockholder action.

     (g) No Adjustments unless Otherwise Provided. Except as hereinbefore
expressly provided, the issuance by the Company of shares of stock of any class
or securities convertible into shares of stock of any class, for cash, property,
labor or services, upon direct sale, upon the exercise of rights or warrants to
subscribe therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, and in any case whether or not
for fair value, shall not affect, and no adjustment by reason thereof shall be
made with respect to, the

                                     VI-10
<PAGE>   11

number of shares of Common Stock subject to Awards theretofore granted or the
purchase price per share, if applicable.

XII. AMENDMENT AND TERMINATION OF THE PLAN

     The Board in its discretion may terminate the Plan at any time with respect
to any shares of Common Stock for which Awards have not theretofore been
granted. The Board shall have the right to alter or amend the Plan or any part
thereof from time to time; provided that no change in any Award theretofore
granted may be made which would impair the rights of the Holder without the
consent of the Holder, and provided, further, that the Board may not, without
approval of the stockholders, amend the Plan to (a) increase the maximum
aggregate number of shares that may be issued under the Plan or (b) change the
class of individuals eligible to receive Awards under the Plan.

XIII. MISCELLANEOUS

     (a) No Right To An Award. Neither the adoption of the Plan nor any action
of the Board or of the Committee shall be deemed to give an employee any right
to be granted an Option, a right to a Restricted Stock Award, a right to a
Performance Award or a right to a Phantom Stock Award, or any other rights
hereunder except as may be evidenced by an Award agreement duly executed on
behalf of the Company, and then only to the extent and on the terms and
conditions expressly set forth therein. The Plan shall be unfunded. The Company
shall not be required to establish any special or separate fund or to make any
other segregation of funds or assets to assure the performance of its
obligations under any Award.

     (b) No Employment Rights Conferred. Nothing contained in the Plan shall
(i)confer upon any employee any right with respect to continuation of employment
with the Company or any Affiliate or (ii) interfere in any way with the right of
the Company or any Affiliate to terminate his or her employment relationship at
any time.

     (c) Other Laws; Withholding. The Company shall not be obligated to issue
any Common Stock pursuant to any Award granted under the Plan at any time when
the shares covered by such Award have not been registered under the Securities
Act of 1933, as amended, and such other state and federal laws, rules and
regulations as the Company or the Committee deems applicable and, in the opinion
of legal counsel for the Company, there is no exemption from the registration
requirements of such laws, rules and regulations available for the issuance and
sale of such shares. No fractional shares of Common Stock shall be delivered,
nor shall any cash in lieu of fractional shares be paid. The Company shall have
the right to deduct in connection with all Awards any taxes required by law to
be withheld and to require any payments required to enable it to satisfy its
withholding obligations.

     (d) No Restriction on Corporate Action. Nothing contained in the Plan shall
be construed to prevent the Company or any Affiliate from taking any action
which is deemed by the Company or such Affiliate to be appropriate or in its
best interest, whether or not such action would have an adverse effect on the
Plan or any Award made under the Plan. No employee, beneficiary or other person
shall have any claim against the Company or any Affiliate as a result of any
such action.

     (e) Restrictions on Transfer. An Award (other than an Incentive Stock
Option, which shall be subject to the transfer restrictions set forth in
Paragraph VII(c)) shall not be transferable otherwise than

          (i) by will or the laws of descent and distribution,

          (ii) pursuant to a qualified domestic relations order as defined by
     the Code or Title I of the Employee Retirement Income Security Act of 1974,
     as amended, or the rules thereunder, or

          (iii) with the consent of the Committee.

     (f) Governing Law. The Plan shall be construed in accordance with the laws
of the State of Illinois.

                                     VI-11<PAGE>   1
                                                                    EXHIBIT 10.9

                                                                  EXECUTION COPY

                                January 18, 2000

Mr. Charles L. Watson
46 Wincrest Falls
Cypress, Texas 77429

Dear Chuck:

     Set forth below are the terms of your employment (the "Agreement") with
Dynegy Inc. (hereinafter referred to as "Dynegy" or the "Company").

     1.   TITLE AND DUTIES

          Your title will be Chairman and Chief Executive Officer of the
Company. Your duties and responsibilities will be as described in the Company's
Bylaws (as amended, modified or supplemented from time to time) and as delegated
by the Board of Directors of the Company (the "Board of Directors") from time to
time during the Term of the Agreement (as defined below), to the extent such
duties and responsibilities are consistent with your duties and responsibilities
as of the day preceding the Effective Date (as defined below), or as otherwise
agreed by you. You will be employed at Dynegy's headquarters in Houston, Texas.
You shall devote your full working time, energy and skill to the performance of
your duties for Dynegy, and will exercise due diligence and reasonable care in
the performance of such duties.

     2.   TERM

          (a) Unless earlier terminated as provided for herein, the term of this
Agreement will be for three (3) years, commencing on the Effective Date and
ending on the third anniversary of the Effective Date (such period, as extended
pursuant to the next succeeding sentence, if applicable, the "Term"), The Term
shall automatically be extended for additional one (1) year periods unless
either the Company or you provides written notice at least sixty (60) days prior
to the date on which this Agreement would otherwise be automatically extended
that such party is electing not to so extend the Term. The term "Effective Date"
means the date of the closing of the proposed merger of Dynegy Inc. and Illinova
Corporation pursuant to that certain merger agreement dated as of June 14, 1999,
as amended.

<PAGE>   2

Mr. Charles L. Watson
January 18, 2000
Page 2

          (b) If your employment with Dynegy is terminated due to your voluntary
resignation or by the Company for "cause" this Agreement shall terminate
immediately (except for the confidentiality, non-competition and
non-solicitation provisions of Paragraph 4 and the provisions of Paragraphs 5
and 6), and the Company shall have no further obligation to you except for the
payment of amounts due before the date of such termination. You further agree
that the benefits which you have received from the execution of this Agreement
through the date of such termination constitute sufficient consideration for
your obligations pursuant to Paragraph 4, notwithstanding the fact that the
Company has no further obligation to you except for the payment of amounts due
before the date of such termination.

     For purposes of this Agreement, you may be terminated for "cause" by
majority vote (excluding yourself) of the Board of Directors of as a result of
(i) your refusal to implement or adhere to lawful policies or lawful directives
of the Board of Directors; (ii) serious misconduct, dishonesty or disloyalty,
directly related to the performance of your duties for the Company or gross
negligence in the performance of your duties for the Company; (iii) your being
convicted (or entering into a plea bargain admitting or not contesting criminal
guilt) in any criminal felony proceeding; (iv) drug or alcohol abuse; (v)
continued failure to perform your duties under this Agreement, which is not
cured within ten (10) days after written notice of such failure is provided to
you by Dynegy; or (vi) any other material breach of this Agreement by you that
is not cured within ten (10) days after written notice of such breach is
delivered to you from the Company.

          (c) If your employment is terminated during the Term of this Agreement
due to resignation following "constructive termination" (as defined below) or
for any other reason other than your voluntary resignation, death, disability or
discharge for cause, you shall receive as your sole compensation in lieu of
further payments to you pursuant to Paragraph 3 hereof: (i) a lump sum amount
equal to the product of (x) 2.99 and (y) the greater of (a) the average annual
Base Salary and incentive compensation, whether payable in cash or stock
options, you were required to be paid by the Company for the highest three (3)
calendar years preceding the calendar year in which your employment is
terminated (or such shorter period as you have actually been employed by the
Company), or (b) your Base Salary and target bonus amount through the date of
termination; (ii) a lump sum amount equal to the net present value, as
determined by the Board of Directors in its sole and absolute discretion, of the
benefits to be provided to you in Paragraphs 3(e), 3(f) and 3(g) of this
Agreement and such other perquisites (if any) being provided to you on the date
of your termination, as if you were still employed for the remainder of the Term
of this Agreement, with regard to those benefits to be provided to you during
the Term of this Agreement, and as if you had completed the Term of this
Agreement with regard to those benefits to be provided to you upon completion of
the Term of this Agreement; (iii) any employee stock options granted to you
prior to or during the Term of this Agreement shall become vested as of the date
of your resignation due to such constructive termination or discharge not for
cause, and you shall have the right to exercise any such vested options through
the end of the Term of this Agreement or one year from the date of termination,
whichever is later; and (iv) for a period of thirty-six (36) months from the
date of such termination, all health and welfare benefits the Company was
maintaining for you and your family as of the date of such resignation or
discharge.

<PAGE>   3

Mr. Charles L. Watson
January 18, 2000
Page 3

          For purposes of this Agreement a "constructive termination" shall be
deemed to have occurred in the event that: (i) your Base Salary as defined in
Paragraph 3(a), bonus compensation under Paragraph 3(b), target range of annual
option grants under Paragraph 3(c) or other compensation as described in
Paragraphs 3(e), 3(f) and 3(g) is reduced; (ii) a significant diminution in your
responsibilities, authority or scope of duties is effected by the Board of
Directors, and such diminution is made without your written consent (without
regard to whether or not any change is made to your title); (iii) the Company
materially breaches this Agreement; (iv) the relocation of the Company's
principal executive offices to a location, or the Company requires you to be
based, outside a fifty (50) mile radius from the city limits of Houston, Texas;
or (v) in the event any "person" other than a mutual fund that acquires the
stock solely for investment purposes or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of more than 50% of the total
voting stock of the Company regardless of whether any change is made to your job
duties, responsibilities or compensation. A "constructive termination" shall not
be deemed to have occurred in a change of control situation other than as set
forth in clauses (i) through (v) above. A "constructive termination" shall not
be deemed to have occurred in connection with a merger or consolidation to which
the Company is a party where the surviving entity which is the ultimate parent
company of the merged or consolidated entities is a public company, provided no
"person" or "group" as referenced in clause (v) above owns more than 50% of the
total voting stock of such surviving entity unless a "constructive termination"
under clauses (i), (ii), (iii) or (iv) has occurred. For the avoidance of doubt,
in order to claim the benefits payable hereunder in the event of a constructive
termination, you must resign. Any resignation by you as a result of assertion of
a constructive termination shall be communicated by delivery to the Board of
Directors within thirty (30) days from the commencement of such constructive
termination by written notice setting forth the grounds therefor, during which
period the Company shall be entitled to cure or remedy the matters set forth in
such notice to your reasonable satisfaction. Unless you withdraw such notice
prior to the expiration of such thirty-day (30) period, such resignation shall
take effect upon the expiration of thirty (30) days from the date of the
delivery of such notice. Any other resignation by you shall be communicated by
thirty (30) days' advance written notice.

          (d) If you die, or become disabled and cannot perform your duties,
your employment hereunder shall be terminated immediately (except that the
confidentiality, noncompetition and nonsolicitation provisions of Paragraph 4
and the provisions of Paragraphs 5 and 6 shall survive the termination of your
employment) and: (i) you (or your estate) shall be entitled to the Base Salary
(as defined in Paragraph 3(a)) payable to you hereunder for twelve (12) months
following the month in which you die or become disabled, plus the amount of any
target bonus as described in Paragraph 3(b) for the year of death or disability,
prorated for the portion of the twelve-month (12) period elapsed in which the
death or disability occurs; (ii) you (or your estate) shall receive, for a
period of twenty-four (24) months from the date of your death or disability, all
health insurance and health benefits that the Company was maintaining for you
and/or your estate and for your family as of the date of your death or
disability; (iii) for a period of five (5) years from the date of your death or
disability, the Company shall continue to make contributions pursuant to any
Split Dollar Agreements between the Company and the Watson

<PAGE>   4

Mr. Charles L. Watson
January 18, 2000
Page 4

1996 Family Trust (an irrevocable trust created on March 22, 1996, by you and
Kim R. Watson, as the Grantors, and David C. Feldman, as the Trustee); (iv) any
employee stock options granted to you during the Term of this Agreement shall
become vested as of the date of your death or disability on the same terms as
provided for the vesting of stock options in Paragraph 2(c) above; (v) and for a
period of three (3) years following the date of your death or disability, the
Company shall continue to maintain Directors and Officers Liability Insurance on
the same terms it thereafter maintains such insurance for its directors and
officers. For purposes of this Agreement, you shall be disabled as of the first
date on which you become eligible to receive disability benefits under the
Company's long-term disability plan (or Social Security disability benefits at a
time when the Company does not maintain a long-term disability plan or such plan
is not available to you).

          (e) Unless otherwise specified herein, all payments under this
Agreement shall be paid in a lump sum, less applicable withholding taxes, within
thirty (30) days following the date of your termination.

     3.   COMPENSATION

          (a) Each year during the Term hereof, you will be paid a base salary
of $1,500,000 per annum ("Base Salary"), payable in accordance with the
Company's payroll guidelines. Increases may be made to your Base Salary at the
discretion of the Board of Directors based upon your individual performance.

          (b) You shall be a participant in the Company's Incentive Compensation
Plan. As part of Dynegy's incentive compensation program, you will have the
opportunity to earn a target bonus in an amount equal to 100% of your Base
Salary and a maximum cash award in an amount equal to 200% of your Base Salary,
dependent upon certain financial or performance objectives, determined in
accordance with such program and by the Board of Directors. To the extent any
incentive compensation in excess of the maximum cash amount referenced above is
payable under the Incentive Compensation Plan in any year to you, the Company
will pay you any such amounts in noncash equivalents (e.g., stock options or
restricted securities of the Company) of equal value, as determined by the Board
of Directors in its sole and absolute discretion. At your election, in lieu of
paying you all or part of such incentive compensation bonus, the Company will
allow you to direct that all or part of such incentive compensation shall be
allocated by the Company to, or expended directly for, charitable contributions
of your selection and/or payments of insurance premiums pursuant to any Split
Dollar Agreement between the Company and the Watson 1996 Family Trust (an
irrevocable trust created on March 22, 1996, by you and Kim R. Watson, as the
Grantors, and David C. Feldman, as the Trustee).

          (c) Upon the Effective Date, you shall receive an initial grant of
stock options pursuant to the Company's Long Term Incentive Plan (the "LTIP")
with a projected value equal to 375% of your Base Salary. These options are
subject to the vesting, forfeiture and other terms and conditions of the LTIP.
Each year during the Term of this Agreement, you will be eligible to receive
stock option grants granted to an employee holding the positions of "Chairman"
and "Chief Executive Officer" in accordance with the requirements and provisions
of the LTIP. The current target range for annual option grants for your position
is a 75th percentile of 375% of

<PAGE>   5
Mr. Charles L. Watson
January 18, 2000
Page 5

your Base Salary. You recognize that any value of an award of "market" options
under the LTIP is a projected value, which is subject to the future performance
of the Company stock, and that there is no guarantee that the actual value of
such options will achieve that value. "Projected Value" means that at the end of
the five years from the date of grant, assuming an increase in market price of
15% per annum during the five years, the stock option may be exercised to obtain
the stated value in excess of the exercise price.

          (d) Upon the Effective Date, any options granted to you prior to
November 1, 1999 shall become vested,

          (e) You will be entitled to participate in Dynegy's benefits programs
for senior management executives, including, without limitation, Dynegy's
deferred compensation plan for executives, as well as any Split Dollar Agreement
between the Company and the Watson 1996 Family Trust (an irrevocable trust
created on March 22, 1996, by you and Kim R. Watson, as the Grantors, and David
C. Feldman, as the Trustee). Without limiting the foregoing, you shall receive
the perquisites set forth on Schedule I attached hereto and by this reference
incorporated herein.

          (f) During the Term of this Agreement, or until termination of this
Agreement if this Agreement terminates prior to expiration of the Term (except
as provided in Paragraph 2(a) hereof), the Company will pay all premiums on a
policy of insurance providing term protection only and no cash values, with a
death benefit payable upon your death in the amount of $1,000,000. You shall at
all times own the policy and have the right to designate the beneficiary of any
death proceeds. You will be responsible for policy selection, coverage and
effectiveness of the policy and any income taxes arising in connection
therewith; the Company's only obligation being to pay such premiums.

          (g) In the event that you remain continuously employed through the
third anniversary of the Effective Date or your separation from employment prior
to completion of the Term of the Agreement is due to termination pursuant to
Paragraph 2(c), then the Company shall provide to you at its expense for a
period of five years thereafter an office separately located from the offices of
the Company that is comparable in size and facilities to that provided by the
Company during the Term of this Agreement. The Company shall also pay for
maintenance of such office space. You shall also be entitled to equip the office
with (and retain as your own following completion of the five year period) the
furniture, cabinets, pictures, equipment and office furnishings (but not any
intrinsically valuable art works or collectibles) used by you in your office at
the end of the Term or at the time of termination. You shall be responsible for
the tax consequences to you of the provisions of this Paragraph 3(g).

     4.   CONFIDENTIALITY

          You recognize and acknowledge that:

          (a) You will have access to certain information concerning the Company
that is confidential and proprietary and constitutes valuable and unique
property of the Company. You agree that you will not at any time, either during
or after your employment, disclose to

<PAGE>   6

Mr. Charles L. Watson
January 18, 2000
Page 6

others, use, copy or permit to be copied, except pursuant to your duties on
behalf of the Company or its successors, assigns or nominees, any secret or
confidential information of the Company (whether or not developed by you)
without the prior written consent of the Board of Directors. The term "secret or
confidential information of the Company" (sometimes referred to herein as
"Confidential Information") shall include, without limitation, the Company's
plans, strategies, potential acquisitions, costs, prices, systems for buying,
selling, and/or trading natural gas, natural gas liquids, crude oil, coal, and
electricity, client lists, pricing policies, financial information, the names of
and pertinent information regarding suppliers, computer programs, policy or
procedure manuals, training and recruiting procedures, accounting procedures,
the status and content of the Company's contracts with its suppliers or clients,
or servicing methods and techniques at any time used, developed, or investigated
by the Company, before or during your tenure of employment to the extent any of
the foregoing are (i) not generally available to the public and (ii) maintained
as confidential by the Company. You further agree to maintain in confidence any
confidential information of third parties received as a result of your
employment and duties with the Company.

          (b) At the termination of your employment, you will deliver to the
Company, as determined appropriate by the Company, all correspondence,
memoranda, notes, records, client lists, computer systems, programs, or other
documents and all copies thereof made, composed or received by you, solely or
jointly with others, and which are in your possession, custody or control at
such date and which are related in any manner to the past, present or
anticipated business of the Company.

          (c) To protect and safeguard the Company's trade secrets and
Confidential Information and also the Company's goodwill with its suppliers and
clients, for that period of time following the date of termination of your
employment for any reason other than pursuant to Paragraph 2(c) hereof (i.e., in
the event of a termination pursuant to the first paragraph of Paragraph 2(c),
the non-compete obligations of this Paragraph 4(c) shall terminate) through the
expiration of the Term or twenty-four (24) months from the date of termination,
whichever is earlier, you will not, within a 50 mile radius of any location
where the Company had an office at any time during the Term hereof or any
location where a client or supplier of the Company (which is a material client
or supplier at any time during the Term hereof) had an office at any time during
the Term hereof, without the prior written consent of the Board of Directors,
directly or indirectly, engage in or be interested in (as owner, partner,
shareholder, employee, director, agent, consultant or otherwise), any business
which is a competitor of the Company, as hereinafter defined. For purposes of
this Agreement, a "competitor of the Company" is any entity, including, without
limitation, a corporation, sole proprietorship, partnership, joint venture,
syndicate, trust or any other form of organization or a parent, subsidiary or
division of any of the foregoing, which, during such period or the immediately
preceding fiscal year of such entity, was engaged in the unregulated marketing,
gathering, transportation or processing of natural gas or derivatives of natural
gas or other hydrocarbons or electricity. For purposes of this paragraph, the
following entities shall not be deemed to be competitors of the Company: (i) a
Local Distribution Company ("LDC") to the extent that any purchases or sales by
such LDC are only for consumption on its system; (ii) a natural gas producer to
the extent that such producer sells only its own production or production of
other working interest owners in wells in which it owns

<PAGE>   7
Mr. Charles L. Watson
January 18, 2000
Page 7

an interest; (iii) a natural gas pipeline company in the jurisdictional aspects
of its business, i.e., other than a nonjurisdictional marketing affiliate or
production affiliate (except as to such production affiliate's own production as
described in clause (ii) of this Paragraph 4(c)); or (iv) an integrated
regulated electric and/or gas utility as long as such utility does not engage in
the unregulated marketing of its generation or power trading other than that
related to the generation or power marketing allocated to its own service areas.
The terms of this Paragraph 4(c) shall not apply to your present or future
investments in the securities of companies listed on a national securities
exchange or traded on the over-the-counter market to the extent such investments
do not exceed five percent (5%) of the total outstanding shares of such company.

          (d) For a period of twenty-four (24) months after the expiration or
termination of your employment for whatever reason, other than pursuant to
Paragraph 2(c) above or for a period of twelve months following the termination
of your employment pursuant to Paragraph 2(c) above, you shall not solicit,
raid, entice, encourage or induce any person who at the time of such expiration
or termination of employment is an employee of the Company, or any of its
subsidiaries or affiliated companies, to become employed by any person, firm or
corporation, and you shall not approach any such employee for such purpose or
authorize or knowingly approve the taking of such actions by any other person,
firm or corporation or assist any such person, firm or corporation in taking
such action.

          (e) You agree that the foregoing restrictions contain reasonable
limitations as to the time, geographical area, and scope of activity to be
restrained and that these restrictions do not impose any greater restraint than
is necessary to protect the goodwill and other legitimate business interests of
the Company, including, but not limited to, the protection of Confidential
Information. You also agree that the general public shall not be harmed by
enforcement of this Paragraph 4. Should any provision in this Paragraph 4 be
held unreasonably broad with respect to the restrictions as to time,
geographical area or scope of activity to be restrained, any such restriction
shall be construed by limiting and reducing it to the extent necessary to render
it reasonable, and as so construed, such provision shall be enforced.

          Accordingly, you consent and agree that if you violate any of the
provisions of this Paragraph 4, the Company and its subsidiaries and affiliated
companies would sustain irreparable harm and, therefore, in addition to any
other remedies which the Company may have under this Agreement or otherwise, the
Company shall be entitled to an injunction from any court of competent
jurisdiction restraining you from committing or continuing any such violation of
this Paragraph 4. You acknowledge that damages at law would not be an adequate
remedy for violation of this Paragraph 4, and you therefore agree that the
provisions of this Paragraph 4 may be specifically enforced against you in any
court of competent jurisdiction. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies available to the
Company for such breach or threatened breach, including the recovery of damages
from you.

     5.   INDEMNIFICATION

          If, at any time during or after the Term of this Agreement, you are
made a party to, or are threatened to be made a party in, any civil, criminal or
administrative action, suit or proceeding by reason of the fact that you are or
were a director, officer, employee or agent of the

<PAGE>   8

Mr. Charles L. Watson
January 18, 2000
Page 8

Company, or of any other corporation or any partnership, joint venture, trust or
other enterprise for which you served as such at the request of the Company,
then you shall be indemnified by the Company, to the fullest extent permitted
under applicable law, against expenses actually and reasonably incurred by you
or imposed on you in connection with, or resulting from, the defense of such
action, suit or proceeding, or in connection with, or resulting from, any appeal
therein if you acted in good faith and in a manner you reasonably believed to be
in or not opposed to the best interest of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe your conduct
was unlawful, except with respect to matters as to which it is adjudged that you
are liable to the Company or to such other corporation, partnership, joint
venture, trust or other enterprise for gross negligence or willful misconduct in
the performance of your duties. As used herein, the term "expenses" shall
include all obligations actually and reasonably incurred by you for the payment
of money, including, without limitation, attorney's fees, judgments, awards,
fines, penalties and amounts paid in satisfaction of a judgment or in settlement
of any such action, suit or proceeding, except amounts paid to the Company or
such other corporation, partnership, joint venture, trust or other enterprise by
you. The foregoing indemnification provisions shall be in addition to any other
rights to indemnification to which you may be entitled.

     6.   ARBITRATION

          The parties hereto may attempt to resolve any dispute hereunder
informally via mediation or other means. Otherwise, any controversy or claim
arising out of or relating to this Agreement, or any breach thereof, shall,
except as provided in Paragraph 4, be adjudged only by arbitration in accordance
with the rules of the American Arbitration Association, and judgment upon such
award rendered by the arbitrator may be entered in any court having jurisdiction
thereof. The arbitration shall be held in the city of Houston, Texas, or such
other place as may be agreed upon at the time by the parties to the arbitration.
The arbitrator(s) shall, in their award, allocate between the parties the costs
of arbitration, which shall include reasonable attorneys' fees of the parties,
as well as the arbitrators' fees and expenses, in such proportions as the
arbitrator(s) deem just; provided, however, notwithstanding the above, in the
event you are the prevailing party, then the Company agrees to reimburse you for
all such costs of arbitration, including, but not limited to, attorneys' fees
and expenses reasonably incurred by you; provided further, notwithstanding the
above, in the event the Company is the prevailing party, then the total costs of
arbitration, including but not limited to attorneys' fees reasonably incurred by
the Company and arbitrators' fees and expenses, that may be allocated to you by
the arbitrator(s) shall not in any event exceed Twenty-Five Thousand Dollars
($25,000). Notwithstanding the foregoing, you shall be entitled to seek specific
performance in a court of competent jurisdiction of your right to be paid your
full compensation until your separation from employment, during the pendency or
dispute of any controversy arising under or in connection with this Agreement.

     7.   EXCISE TAXES

          (a) In the event that any payment or benefit received or to be
received by you pursuant to the terms of this Agreement in connection with and
contingent on the termination of your employment with the Company (the "Contract
Payments") or of any other plan, arrangement or agreement of the Company (or any
affiliate) ("Other Payments" and, together

<PAGE>   9
Mr. Charles L. Watson
January 18, 2000
Page 9

with the Contract Payments, the "Payments") would be subject to the excise tax
(the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986
(as amended from time to time, the "Code") as determined as provided below, the
Company shall pay to you, at the time specified in Section 7(b) below, an
additional amount (the "Gross-Up Payment") such that the net amount retained by
you, after deduction of the Excise Tax on Payments and any federal, state and
local income tax and the Excise Tax upon the Gross-Up Payment, and any interest,
penalties or additions to tax payable by you with respect thereto, shall be
equal to the total present value (using the applicable federal rate (as defined
in Section 1274(d) of the Code in such calculation) of the Payments at the time
such Payments are to be made. The Company shall have the right to make any such
Gross-Up Payment, in whole or in part, in the form of a noncash payment of equal
value (as determined by Independent Counsel) to that portion of the Gross-Up
Payment had it been paid in cash. For purposes of determining whether any of the
Payments will be subject to the Excise Tax and the amounts of such Excise Tax,
(1) the total amount of the Payments shall be treated as "parachute payments"
within the meaning of section 280G(b)(2) of the Code, and all "excess parachute
payments" within the meaning of section 280G(b)(1) of the Code shall be treated
as subject to the Excise Tax, except to the extent that, in the opinion of
independent counsel selected by the Company and reasonably acceptable to you
("Independent Counsel"), a Payment (in whole or in part) does not constitute a
"parachute payment" within the meaning of section 280G(b)(2) of the Code, or
such "excess parachute payments" (in whole or in part) are not subject to the
Excise Tax, (2) the amount of the Payments that shall be treated as subject to
the Excise Tax shall be equal to the lesser of (A) the total amount of the
Payments or (B) the amount of "excess parachute payments" within the meaning of
section 280G(b)(1) of the Code (after applying clause (1) hereof), and (3) the
value of any noncash benefits or any deferred payment or benefit included in the
Payments or Gross-Up Payment, as applicable, shall be determined by Independent
Counsel in accordance with the principles of sections 280G(d)(3) and (4) of the
Code. For purposes of determining the amount of the Gross-Up Payment, you shall
be deemed to pay federal income taxes at the highest marginal rates of federal
income taxation applicable to the individuals in the calendar year in which the
Gross-Up Payment is to be made and state and local income taxes at the highest
marginal rates of taxation applicable to individuals as are in effect in the
state and locality of your residence in the calendar year in which the Gross-Up
Payment is to be made, net of the maximum reduction in federal income taxes that
can be obtained from deduction of such state and local taxes, taking into
account any limitations applicable to individuals subject to federal income tax
at the highest marginal rates.

          (b) The Gross-Up Payments provided for in Paragraph 7(a) hereof shall
be made upon the earlier of (i) the payment to you of any Payment or (ii) the
imposition upon you or payment by you of any Excise Tax.

          (c) If it is established pursuant to a final determination of a court
or an Internal Revenue Service proceeding or the opinion of Independent Counsel
that the Excise Tax is less than the amount taken into account under Section
7(a) hereof, you shall repay to the Company within thirty (30) days of your
receipt of notice of such final determination or opinion the portion of the
Gross-Up Payment attributable to such reduction (plus the portion of the
Gross-Up Payment attributable to the Excise Tax and federal, state and local
income tax imposed on the Gross-Up Payment being repaid by you if such repayment
results in a reduction in Excise

<PAGE>   10

Mr. Charles L. Watson
January 18, 2000
Page 10

Tax or a federal, state and local income tax deduction) plus any interest
received by you on the amount of such repayment. If it is established pursuant
to a final determination of a court or an Internal Revenue Service proceeding or
the opinion of Independent Counsel that the Excise Tax exceeds the amount taken
into account hereunder (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up Payment), the
Company shall make an additional Gross-Up Payment in respect of such excess
within thirty (30) days of the Company's receipt of notice of such final
determination or opinion.

          (d) In the event of any change in, or further interpretation of,
sections 280G or 4999 of the Code and the regulations promulgated thereunder,
you shall be entitled, by written notice to the Company, to request an opinion
of Independent Counsel regarding the application of such change to any of the
foregoing, and the Company shall use its best efforts to cause such opinion to
be rendered as promptly as practicable. All fees and expenses of such
Independent Counsel incurred in connection with this Agreement shall be borne by
the Company.

     8.   PHYSICAL EXAMINATION

          You agree, during each fiscal year of the Company, to undergo a
complete physical examination at Company expense, and you further agree that the
finding or diagnosis of a terminal illness or physical or mental condition that
will materially impair your ability to perform your duties and responsibilities
under this Agreement, which is the result of such examination, will be disclosed
to the Executive Committee of the Board of Directors. You agree to direct such
disclosure to the Executive Committee of the Board of Directors by an instrument
in writing, if necessary, but no disclosure shall be made to any other party
without your written consent.

     9.   OTHER PROVISIONS

          (a) THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICTS OF LAW,
RULE OR PRINCIPLE THAT MIGHT OTHERWISE REFER TO THE SUBSTANTIVE LAW OF ANOTHER
JURISDICTION.

          (b) Except as otherwise indicated, this Agreement is not assignable
without the written authorization of both parties, provided that the Company may
assign this Agreement to any entity to which the Company transfers substantially
all of its assets or to any entity which is a successor to the Company by
reorganization, incorporation, merger or similar business combination.

          (c) Except as otherwise provided herein, the provisions of Paragraphs
4, 5 and 6 of this Agreement shall survive the termination of this Agreement.

          (d) Except as otherwise provided in Paragraph 7 hereof, all payments
to you under this Agreement will be subject to the withholding of all applicable
employment taxes and income taxes; provided, however, that at your request the
parties hereto will use reasonable efforts to explore alternatives to allow the
Company to make charitable contributions on behalf

<PAGE>   11
Mr. Charles L. Watson
January 18, 2000
Page 11

of the employee by redirecting a portion of your annual bonuses to charitable
organization(s) chosen by you in accordance with Paragraph 3(b) of this
Agreement.

          (e) This Agreement supersedes all previous employment agreements,
written or oral, between the Company and you. This Agreement may be amended only
by written amendment duly executed by both parties hereto or their legal
representatives and authorized by action of the Board of Directors. Except as
otherwise specifically provided in this Agreement, no waiver by either party
hereto of any breach by the other party hereto of any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of a
subsequent breach of such condition or provision or a waiver of a similar or
dissimilar provision or condition at the same or at any prior or subsequent
time.

          (f) Any notice or other communication required or permitted pursuant
to the terms of this Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by United States mail, first class,
postage prepaid and registered with return receipt requested, addressed to the
intended recipient at his or its address set forth below and, in the case of a
notice or other communication to the Company, directed to the attention of the
Board of Directors with a copy to the Secretary of the Company, or to such other
address as the intended recipient may have theretofore furnished to the sender
in writing in accordance herewith, except that until any notice of change of
address is received, notices shall be sent to the following addresses:

     IF TO YOU:                              IF TO THE COMPANY:
          Charles L. Watson                        Dynegy Inc.
          46 Wincrest Falls                        1000 Louisiana, Suite 5800
          Cypress, Texas 77429                     Houston, TX 77002
                                                   Attn: Chief Executive Officer

          (g) If any one or more of the provisions or parts of a provision
contained in this Agreement shall for any reason be held to be invalid, illegal
or unenforceable in any respect, such invalidity or unenforceability shall not
affect any other provision or part of a provision of this Agreement, but this
Agreement shall be reformed and construed as if such invalid or illegal or
unenforceable provision or part of a provision had never been contained herein
and such provisions or part thereof shall be reformed so that it would be valid,
legal and enforceable to the maximum extent permitted by law.

          (h) Neither you nor the Company will make or authorize any public
statement disparaging the other in its or his business interests and affairs.
Notwithstanding the foregoing, neither party shall be (i) required to make any
statement which it or he believes to be false or inaccurate, or (ii) restricted
in connection with any litigation, arbitration or similar proceeding or with
respect to its response to any legal process. The provisions in this Paragraph
9(h) shall survive the termination of your employment hereunder, irrespective of
the reason therefor.

          (i) The waiver by the Company of breach of any provision of this
Agreement by you shall not operate or be construed as a waiver of any subsequent
breach by you. The

<PAGE>   12
Mr. Charles L. Watson
January 18, 2000
Page 12

waiver by you of a breach of any provision of this Agreement by the Company
shall not operate or be construed as a waiver of any subsequent breach by the
Company.

          (j) You shall not be required to mitigate damages (or the amount of
any compensation provided under this Agreement to be paid) following your
termination of employment, by seeking employment or otherwise.

          (k) If any provision of this Agreement as applied to either party or
to any circumstances shall be adjudged by a court of competent jurisdiction to
be void or unenforceable, the same shall in no way affect any other provision of
this Agreement or the validity or enforceability of this Agreement.

          (1) The section headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.

          (m) This Agreement may be executed in one or more counterparts, which
shall, collectively and separately, constitute one agreement.

          (n) Notwithstanding anything to the contrary set forth in this
Agreement, the Company may cause any of its subsidiaries for which you render
services to pay or otherwise satisfy, in whole or in part, some or all of the
Company's obligations hereunder.

<PAGE>   13
Mr. Charles L. Watson
January 18, 2000
Page 13

          If the foregoing reflects your understanding of the terms of your
employment with the Company, please execute each copy of this letter in the
space provided below.

                                     DYNEGY INC.

                                     By:
                                        ---------------------------------------
                                     Name:
                                        ---------------------------------------
                                     Title:
                                        ---------------------------------------

AGREED AND ACCEPTED
this ____ day of January, 2000

-------------------------------------
Charles L. Watson

<PAGE>   14

                    Watson Employment Agreement - Schedule I

                              EXECUTIVE PERQUISITES

Except as provided below, as long as you remain in the employment of the Company
during the Term of this Agreement, you will be entitled to the following:

1.        At your option, the use of an automobile of a type equivalent to that
          presently provided by the Company for use by you, your spouse and
          members of your immediate family, or a cash automobile allowance of
          $2,000 per month.

2.        Personal membership in the Petroleum Club in Houston, Texas and two
          (2) other downtown Houston luncheon clubs of your choice, including
          the reimbursement of all dues and business-related expenses. These
          memberships shall be assigned to you in the event of termination of
          the Agreement for any reason, and you shall pay dues from the date of
          termination but you shall not be obligated to reimburse the Company
          for any amounts paid by the Company prior to termination.

3.        Personal country club membership in two (2) country clubs of your
          choice, including the reimbursement of all dues and business-related
          expenses. These memberships shall be assigned to you in the event of
          termination of the Agreement for any reason, and you shall pay dues
          from the date of termination but you shall not be obligated to
          reimburse the Company for any amounts paid by the Company prior to
          termination. Notwithstanding anything to the contrary in this
          Agreement or this Schedule, in no case shall the Company be obligated
          to pay any amount of dues, fees or reimbursement for or to any country
          club or luncheon club that, in the determination of the Board of
          Directors, in its sole discretion, restricts membership or the
          performance of services or the use of facilities on the basis of race,
          religion, gender or national origin.

4.        Vacations and holidays in accordance with the Company's policies in
          effect from time to time for its senior executive officers, but not
          less than six (6) weeks of vacation during each fiscal year.

5.        A benefit package including medical, hospital, dental, disability and
          life insurance plans and coverage for you and your spouse and children
          at least as favorable to you (and your spouse and children) as that
          provided to you immediately prior to the commencement of the Term of
          this Agreement unless, with respect to any particular plan or
          coverage, the continuation of such existing plan or coverage would
          have material adverse financial or regulatory consequences to the
          Company.

6.        Reimbursement of fees for financial and/or federal income tax planning
          (and reasonable accounting and legal fees associated therewith), the
          allocable cost of which perquisites to you are not to exceed One
          Hundred Thousand Dollars ($100,000) per annum.

<PAGE>   15

7.        Use of any aircraft owned or leased by the Company for Company
          business in accordance with the policies adopted by the Board of
          Directors, which policy is subject to the approval of the Board of
          Directors from time to time. You may also, in accordance with such
          policies, which shall not be amended as they apply to you without your
          prior consent, use any aircraft owned or leased by the Company for
          your own personal business; provided, however, that (i) such use does
          not adversely interfere with the use of such aircraft for Company
          business, (ii) you shall maintain any records reasonably requested by
          the Board of Directors, (iii) you shall compensate the company for
          such use at the Company's actual after-tax costs for the use of such
          aircraft and (iv) such personal use by you does not exceed fifty (50)
          hours of flight time usage of such aircraft on a calendar year basis.
          You shall be responsible for paying any income taxes attributable to
          taxable income arising from such aircraft use.

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