Dynegy, the Houston-headquartered energy company that’s been running the South Bay Power Plant, says it has about $40 million stashed away to help pay for dismantling and cleaning up the plant.

But Dynegy’s in trouble.

Standard and Poor’s Ratings Service lowered the rating on the company’s bonds deeper into junk status Tuesday in the wake of the company’s second failure to sell itself to an investor. S&P said the company faces “a plethora of challenges” and downgraded its credit rating to two notches above default.

It lost almost $1 billion in nine months last year, and its entire board of directors and two top executives just quit. According to The Wall Street Journal, Dynegy may not have enough cash flow to meet its debt obligations in 2015 and 2016, and analysts are now calling the outlook for the company negative.

The company’s financial difficulties don’t immediately mean trouble for the dismantling project — and won’t unless the problems worsen. Though it’s not yet been raised as a possibility, if the company’s problems persist and Dynegy files for bankruptcy somewhere down the line, that could have serious implications for the Unified Port of San Diego, which owns the site.

If the company goes bust, the port would have to line up with other creditors to get the money promised for cleaning up the site. That’s because Dynegy hasn’t held the $40 million it’s been collecting from ratepayers in trust for the port — something that would insulate that money from creditors in the case of insolvency at Dynegy.

Last week, as I watched the news on Dynegy unfold in The Wall Street Journal, New York Times and elsewhere, I got to thinking about all that money the company says it has and how secure that money would be if things get worse. I called a couple of top bankruptcy lawyers, Professor Arnold Rosenberg, assistant dean at Thomas Jefferson School of Law, and Ali Mojdehi, a partner at Baker & McKenzie in San Diego.

Both told me that the key question to ask Dynegy is whether the company’s accountants have kept the $40 million in trust for the port — in other words, kept it separate from the day-to-day revenues and expenditures of the company.

That’s a vital point if the company goes bankrupt, the lawyers said.

“Having the money in trust means it’s not exposed to general claims from creditors of the entity in bankruptcy. If it’s not in trust, you are one creditor among many,” Mojdehi said.

So I asked Dynegy’s spokesman, David Byford, that simple question: Has the company held the money in trust, yes or no?

Byford didn’t answer the question. “Dynegy stands ready, willing and able to meet our contractual obligations relating to the South Bay facility,” he wrote in an email.

Ron Powell, spokesman for the port, said the money Dynegy collected has not been kept in trust.

“It’s a line item on their budget,” he said.

David Malcolm, the businessman who set up the deal that transferred the land to the port in 1998, concurred. “There were never any trusts set up. Nothing like that. Ever,” he told me.

Mojdehi said it would still be possible for the port to request that Dynegy put some security behind its $40 million promise to pay for the teardown and cleanup of the power plant. The port could ask the company to put the funds in trust, he said, though he doubted whether the port would have much leverage in such a discussion.

That might be a good idea, he said. No matter how unlikely bankruptcy is, it would always be better for the port to insulate the money from a future bankruptcy.

“It would be prudent to put the municipality in a more secure position regardless,” Mojdehi said. “Even if it’s a 10 percent, 20 percent, 30 percent chance of bankruptcy, it would be wise.”

Powell said the port already has a backup plan if Dynegy files for bankruptcy.

The original tenants of the power plant, Duke Energy, promised the port they would demolish and clean up the power plant, even if the port has trouble collecting from whatever energy company has been running it, Powell said.

“Duke will do it if Dynegy is unable to perform,” Powell said.

And Powell pointed out that the port still has about $20 million in trust that the state gave the port in 1998. That money can only be used to clean up the power plant site.

Dynegy’s troubles, and the possible consequences for the port, are especially relevant considering a deal that’s currently being discussed in which Chula Vista could take over the responsibility for cleaning up the power plant site. That deal, which I wrote about last week, involves Dynegy giving Chula Vista $50 million in return for being released from liability for the site.

Malcolm, who’s pushing that deal, says Dynegy’s shaky financial situation makes it all the more important that Chula Vista at least consider taking the company up on its offer.

But City Manager Jim Sandoval said the city won’t move forward with anything unless it can guarantee that the cost of the demolition and cleanup of the power plant can be done for the roughly $70 million earmarked for it. That includes getting insurance for the deal and establishing the environmental parameters of the work that needs to be done, he said.

“This may cause us to try and move more quickly, but the reservations or concerns we have that we need to truth out, it doesn’t change those at all,” Sandoval said.

Correction: This post originally stated that Dynegy’s new bond rating from Standard & Poor’s was above junk status. In fact, the new rating puts the company’s bonds deeper into junk status, two notches above default. We regret the error.

Please contact Will Carless directly at will.carless@voiceofsandiego.org or at 619.550.5670 and follow him on Twitter: twitter.com/willcarless.

Will Carless was formerly the head of investigations at Voice of San Diego.

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