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Dynegy, the Houston-based company responsible for dismantling and cleaning up the South Bay Power Plant in Chula Vista, is threatening bankruptcy, The Wall Street Journal reported.

I reported last week on the company’s serious financial woes and today’s news brings the possibility of bankruptcy one step closer.

Bankruptcy would be bad news for the Unified Port of San Diego, which owns the power plant site. The port has a promise from Dynegy that the company will complete the cleanup of the power plant, which was shuttered in December. Dynegy has said it has about $40 million stashed away for that purpose. But that money is not protected by a trust, meaning that if the company goes belly up, the port will have to line up with all Dynegy’s other creditors to get the money.

“A claim like this is an unsecured obligation and the company may have hundreds of millions of dollars of other unsecured obligations,” said Pat Shea, a local bankruptcy attorney. “A creditors’ group may well say, ‘We’ll give you $5 million or $10 million to walk away,’ and that wouldn’t be an unusual situation.”

Here’s some detail from The Wall Street Journal story:

The company said it may be forced to issue debt or equity or sell assets to raise cash but “cannot provide any assurances that we will be successful in accomplishing any of these plans.” If unsuccessful, the company could file for Chapter 11 bankruptcy protection: We “may seek protection from creditors… or an involuntary petition for bankruptcy may be filed against us,” Dynegy said in the filing.

The warning came after Dynegy Tuesday reported that its fourth-quarter loss narrowed to $164 million, or $1.36 a share, as it incurred fewer charges, from a loss of $355 million, or $2.33 a share, in the year-ago period. Revenue rose 2% to $451 million.

For 2010, Dynegy’s loss narrowed to $234 million on revenues of $2.32 billion versus a 2009 loss of $1.26 billion on revenues of $2.46 billion.

Port spokesman Ron Powell has sought to tamp down concerns about Dynegy’s unstable financial situation, saying last week that the port still has a legal claim for cleaning up the site against power company Duke Energy, which was the original lessee of the power plant in 1999.

“Duke will do it if Dynegy is unable to perform,” Powell told me last week.

But Duke will only be on the hook for the portion of the cleanup Dynegy is unable to pay for, something that wouldn’t be clear until after a bankruptcy has run its course.

I got a call this morning from a furious David Malcolm. Malcolm is the businessman who has been trying to broker a deal between Dynegy and the city of Chula Vista, whereby the city would take on liability for dismantling the plant and cleaning up the site in exchange for $50 million from Dynegy.

Malcolm said that deal is now dead. He blamed delays from the port, which would have to sign off on such a deal.

“We could have done it months ago if it wasn’t for these yo-yos at the port,” Malcolm told me. “Now we’ve lost our chance.”

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

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

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