The credit rating service Standard & Poor’s said Thursday that its ratings for Dynegy Inc., which stand at BBB+/A2, and its subsidiaries will remain on Credit Watch with negative implications, reflecting what it called “several obstacles” facing the Houston-based energy trader. “Foremost is the uncertainty surrounding the pending lawsuit filed by Enron Corp. that alleges that Dynegy falsely executed its right to terminate the merger. Standard & Poor’s cannot at this time determine the outcome of such litigation.”

The Credit Watch “indicates the uncertainty regarding the recapture of Dynegy’s $1.5 billion investment in Enron, which was transacted as a result of the since-terminated merger agreement. The investment capital was received from ChevronTexaco Corp., Dynegy’s largest investor. The outcome of this litigation could span many different possibilities from full recovery of investment and repayment to ChevronTexaco of a $1.5 billion preferred stock holding with a 6% coupon.”

Standard & Poor’s said that “in light of certain events related to the energy trading and marketing industry,” it is “examining general counterparty confidence and liquidity issues. A lack of counterparty confidence could result in lower trading volumes, which could affect a firm’s financial performance. In addition, a lack of confidence could spur liquidity issues as counterparties demand increases in collateral in order to maintain trading relationships. Liquidity positions can also become stressed due to ratings triggers embedded within securities and trading contracts.”

Earlier this week, Dynegy announced it would restructure its balance sheet to address debt concerns, calling for $500 million in new equity issuances and another $750 million in asset sales and capital expenditure reductions in 2002.

Thursday Dynegy said it sold 25 million shares of Class A common stock at $20.75 per share in an underwritten public offering related to the capital restructuring program announced on Monday (see Daily GPI, Dec. 18 ). Net proceeds from the sale totaled $494 million and will be used to reduce debt. Lehman Brothers acted as sole underwriter and retains a 10% over-allotment option for 30 days.

Dynegy CEO Chuck Watson also said that, separate from the equity offering, members of Dynegy’s leadership team, including himself and President and COO Steve Bergstrom, will purchase more than 1.2 million shares of equity at the same price, less underwriter fees, directly from the company.

This issuance “is an important next step in the execution of our strategy to strengthen Dynegy’s financial position in light of the changing financial standards in the energy merchant industry,” said Watson. “The rapid execution of this equity offering demonstrates Dynegy’s strong commitment to the capital restructuring program we outlined this past Monday.”

An additional risk, noted Standard & Poor’s, is that another rating agency “would downgrade Dynegy’s ratings to noninvestment grade, which could erode counterparty confidence, trip rating triggers, and precipitate a crisis. Dynegy incorporates various rating triggers in its contracts at the request of its counterparties. Some of these rating triggers may precipitate termination of agreements based on downgrade by one rating agency only, as opposed to downgrade by two or three rating agencies.”

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