Shareholders Amend Lawsuit Against Dynegy

A shareholder lawsuit originally filed last year against Dynegy Inc. was amended on Friday to include more plaintiffs in a complaint that alleges the company hid an $850 million loan from Citicorp through an off-balance sheet transaction in 2000 to preserve its credit rating. The lawsuit is led by the University of California, which has lost millions on its Dynegy investments.

The lawsuit centers on a transaction referred to as "Black Thunder," which was disclosed last year by Dynegy. Last year, Black Thunder was one of $300 million in ratings triggers removed by Dynegy to help it secure credit and restructure (see Daily GPI, July 1, 2002). The amended complaint added several financial institutions as defendants, which the lawsuit alleges acted as underwriters for fees to enable Dynegy to sell debt offerings.

According to the complaint, Dynegy allegedly used two companies to complete the transactions, Black Thunder, and Catlin Associates, which has also been disclosed. For Black Thunder, Citigroup provided an $824.5 million loan. The loan in turn was allegedly used to invest in Catlin, in which Dynegy contributed $100 million. Catlin then loaned Dynegy $945 million, according to the lawsuit. Following the Catlin loan, Dynegy allegedly consolidated Catlin on its balance sheet, eliminating the debt, and the Black Thunder investment in Catlin was shown as an equity interest on its balance sheet.

Apparently, Dynegy has been negotiating a settlement with the plaintiffs over the transactions, and a spokesman for the University of California told the Houston Chronicle that the school remained open to a settlement.

"The university remains interested and open to such talks if they are likely to bear substantive results for shareholders," spokesman Trey Davis told the Chronicle. He said that initially, Dynegy was ready to resolve the lawsuit, but the school "felt it was appropriate" to file the amended lawsuit June 6. The University of California system was said to have lost nearly $113 million on its Dynegy investment between Nov. 1, 2000 and May 7, 2002.

In the period of time alleged in the lawsuit, Dynegy's share price fell from $49.69 on Nov. 1, 2000 to $12.26 on May 7, 2002. On Monday, Dynegy's share price was hovering around $4.42 a share.

The lawsuit also cites another transaction by Dynegy, Project Alpha. Dynegy has already settled charges with the Securities and Exchange Commission concerning Project Alpha, agreeing to pay $3 million. Dynegy admitted no wrongdoing in that case.

In other news, Standard & Poor's Ratings Services (S&P) said Monday that the uncertainty surrounding the sale of Dynegy's transmission system, owned by its subsidiary Illinois Power Co. (IP), will not affect Dynegy's credit quality. The $239 million sale to Trans-Elect Inc., which was announced in October 2002, has met opposition by the Federal Energy Regulatory Commission, which objected to some of the terms of the agreement resulting in the transaction's termination.

However, Dynegy CEO Bruce Williamson said in April during a conference call that the Trans-Elect deal was in trouble (see Daily GPI, April 30). The transaction originally was set to close on July 7. Williamson said that when the IP assets were put up for sale last October, Dynegy was in a "much more severe situation than right now" (see Power Market Today, Oct. 10, 2002).

By not completing the sale, Williamson said Dynegy "has much greater ability to drop back, look at the assets, continue to work with Trans-Elect...[or] look at other parties who may have an interest in the assets. It can be a 'can-do' instead of a 'must-have' transaction." S&P said it would continue to monitor the situation.

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