Dynegy Inc. on Friday reached a comprehensive settlement agreement related to two shareholder lawsuits over "Project Alpha," a dubious structured natural gas transaction that ultimately helped force the resignation of founder and CEO Chuck Watson and was a factor in the company's massive restructuring.
By settling the lawsuits, Dynegy will record a 1Q2005 pretax charge of $225 million ($155 million after tax). The settlements and expenses will impact the company's 2005 earnings guidance estimate, but they do not affect core business earnings, according to Dynegy.
Project Alpha first publicly surfaced in April 2002, after a report in the Wall Street Journal indicated that Dynegy was being scrutinized for the transaction by the Securities and Exchange Commission (see NGI, April 8, 2002). A formal investigation soon followed, and the company came under scrutiny by the Federal Energy Regulatory Commission over roundtrip gas trades with other energy marketers. Less than two months later, Watson and several other executives had resigned (see NGI, June 3, 2002).
One lawsuit settled Friday was brought by the regents of the University of California as a class action in U.S. District Court in Houston. In the lawsuit, regents alleged Dynegy had violated securities laws primarily related to Alpha, which the company entered into in 2001. The class action included claims for damages on behalf of a class of purchasers of Dynegy Class A common stock between June 2001 and July 2002.
The agreement, subject to federal court approval, provides a payment of $468 million, which includes $150 million to be covered by Dynegy's director and officer insurance policies, a $250 million cash payment, and issuance of $68 million in Class A common stock to the class represented by the regents.
The settlement includes two payments totaling $250 million will be made this year. An initial payment of $175 million will be made in 2Q2005, followed by a second payment of $75 million upon federal court approval.
Dynegy also will issue Class A common stock worth $68 million following court approval. The number of shares will be determined based on a calculation using a volume weighted average stock price for Dynegy Class A common stock for 20 trading days ending Friday (April 15).
The settlement also requires that two new qualified directors be elected to the company's board of directors. The directors will be from a list of at least five qualified candidates submitted by the regents, and in accordance with a time schedule consistent with the approval of the settlement by the federal court.
The second lawsuit was brought in Texas district court by two shareholders. In this agreement, Dynegy agreed to pay $5 million to cover the attorney fees and expenses, and it agreed to settle the derivative litigation "on the basis of corporate governance changes, many of which have been implemented since the claim was filed.: This settlement is not part of the $468 million payment.
"As with other elements of our self-restructuring, by entering into these settlement agreements we are taking responsibility for the resolution of issues associated with a past era for the company in order to put them behind us," said CEO Bruce A. Williamson. "These settlements represent the last significant legal impediments to the pursuit of growth opportunities for our Natural Gas Liquids and Power Generation businesses. With these matters resolved, management and the board of directors can concentrate fully on the future direction of our company to maximize value for shareholders."
Williamson added, "from a governance perspective, we look forward to adding two new members to our Board of Directors. We are confident that the diversity of skills and contributions of the new directors will enhance our industry-leading corporate governance practices."
Dynegy and various other parties settling the litigation did not admit to any liability by the company, its directors or officers. In addition, there were no findings of any violation of federal securities laws, Dynegy said.
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