Dynegy Inc. apparently is attempting to negotiate a settlement of an investigation of its accounting practices by the Securities and Exchange Commission (SEC), according to a report in the Wall Street Journal. Sources told the Journal that lawyers for Dynegy have been discussing a resolution with the SEC, but it was not clear how much progress had been made, or whether Dynegy also was attempting to resolve a criminal inquiry by the Department of Justice.

The SEC has been examining Project Alpha, one of Dynegy’s natural gas trading arrangements formed in April 2001. The physical gas supply transaction was entered into by subsidiary DMT Supply LP, and consists of a five-year contract with ABG Gas Supply LLC, an unrelated third party, that gave Dynegy access to a significant long-term supply of physical gas, cash funding and a permanent tax benefit. Under terms of the contract, DMT bought gas at a discount to market prices over the first nine months of the contract. For the remaining 51 months of the contract, DMT will purchase gas at a premium to market prices. ABG acquires the gas through standard New York Mercantile Exchange contracts to fulfill its sales commitments to DMT, which then takes title to the gas at Henry Hub and markets it to customers.

When the SEC launched the investigation last April (see Daily GPI, April 26), then-CFO Rob Doty explained that the transaction gave Dynegy a tax benefit of about $85 million, and $35 million in costs on a pre-tax basis last year. Dynegy originally classified the net cash inflow from the gas supply contract as operating cash flow in its quarterly and year-end financials. Activity under the contract resulted in net cash inflow of about $300 million in 2001.

However, a report originally published April 3 in the Journal about Project Alpha claimed that Dynegy had “engaged in some complex accounting designed at least in part to buff its financial profile.” The SEC then began an informal inquiry through both its Washington, DC office as well as the regional Fort Worth office. At that time, Doty said the contract’s accounting was explained, and that the SEC staff had sent its concurrence with Dynegy’s contract details. Doty said then that the DC inquiry had been resolved as far as he knew and was closed. However, the Fort Worth inquiry apparently is still open.

Also following the meeting with staff from the SEC Office of the Chief Accountant, Dynegy decided to present the cash flow associated with the gas supply contract as a financing activity in its consolidated statement of cash flows. The change in presentation did not alter the tax benefit recognized in 2001, nor the balance sheet.

©Copyright 2002 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.