The chairman and chief executive of the struggling energy company Dynegy, whose departure was announced on Tuesday, is entitled under his contract to a huge severance check -- one that is about $33 million more than he would have made had the company allowed him to serve out the eight months remaining on the contract.
Charles L. Watson guided Dynegy from a tiny company into a member of the Fortune 500 and just six months ago appeared to have vaulted it into the top ranks of American business by agreeing to acquire Enron.
But that deal, which soon fell apart as Enron collapsed, ended up putting Dynegy under a microscope, and Mr. Watson's position weakened this year with continued disclosures of questionable accounting practices and trading techniques in the energy industry. Dynegy faces an accounting investigation by the Securities and Exchange Commission, although the company said that had nothing to do with Mr. Watson's departure.
Dynegy declined to discuss Mr. Watson's severance package, but his employment contract was made public more than two years ago, and it provided for substantial payments if he was forced out. The term in the contract is "constructive termination," and it requires that he be paid what amounts to three years' compensation even though his contract had less than a year to run.
Moreover, the cash the contract calls for him to get now includes the "projected value" of stock options he would have received had he stayed at Dynegy for three more years and the stock had risen for years to come. He will receive that money without having to wait to see whether the stock really does rise. Including the expected value of his options, he has been making more than $11 million a year.
In addition, he is to receive compensation for what he would have earned the next eight months, before his contract expired on Feb. 1, 2003. While the board has some discretion in fixing that amount, it could be about $7 million, for a total value of $40 million.
For Mr. Watson, 52, the money means that he may wind up doing better financially than he would have had he been able to keep his job for the next several years. And he certainly does better than he would have had he left next February.
Just why Dynegy's board decided to take that financial hit is not clear. But it appears that the board felt that with investor confidence ebbing, it could not afford to have Mr. Watson in charge the rest of this year.
A Dynegy spokesman, Steve Stengel, declined to comment on Mr. Watkin's severance. "That issue is between Chuck and the board, and we are not going to comment on it," he said. Nonetheless, S.E.C. rules will force Dynegy to disclose the figure at a later date.
Many chief executives have contracts that provide for generous payments if they are forced out before their contracts expire. But Mr. Watson's contract is unusual in that it provided for such large payments in addition to what he would have received if he had kept his job. It is also unusual to cash out the expected value of options that had not been granted.
The contract's severance benefits would not have applied if Mr. Watson had resigned on his own, but that does not appear to be the case. In announcing Mr. Watson's departure on Tuesday, Otis Winter, the company's newly named lead director, said "the board and Chuck concluded" that Mr. Watson should leave. He added that "it was the independent directors of Dynegy who made these decisions."
Mr. Watson, who began running Dynegy's predecessor in 1989, signed his current contract in early 2000, just before Dynegy's merger with Illinova, the parent of Illinois Power, took effect on Feb. 1 of that year. The board could have allowed Mr. Watson to stay until his contract expired on Feb. 1 and thus avoided having to pay the additional $33 million in severance, plus three years of health insurance benefits, as called for in the contract.
But the board could not have simply kept Mr. Watson on the payroll while someone else performed his duties and guided the company in a new direction. The contract stated that there would be a constructive termination if "a significant diminution in your responsibilities, authority or scope of duties is effected by the board of directors," even if his title did not change.
The board could have avoided paying the severance had it fired Mr. Watson for cause, but it appears not to have done that. Mr. Winter was careful to say that the departure had nothing to do with pending investigations of the company's accounting practices. Instead, he said, there was "a conclusion that a new management focus was needed."
The year 2000, when Mr. Watson signed his contract, will remain as the time Dynegy shined the brightest and he did the best financially. In transactions related to the closing of the Illinova merger, Mr. Watson sold part of his stake in Dynegy for $227.8 million. A few months later, in April and May of 2000, he took in another $19.2 million, selling shares at an average price of $29.74 a share, adjusted for a subsequent split.
But he did not sell more shares as Dynegy's stock took off later that year, buoyed by the California energy crisis and the perspective that energy traders were in a good position. Dynegy's stock peaked in September 2000 at $59.47 a share.
The shares climbed as high as $47.20 last November after Mr. Watson agreed that Dynegy would acquire its larger rival, Enron, at a price that Mr. Watson was confident was a bargain. But as Enron continued to unravel, investor confidence in Dynegy also faded, and it called off the deal later that month. This year, as investigations intensified, the shares have fallen further. Yesterday, shares of Dynegy fell $1.19, to $8.50.
Mr. Watson's contract provides that in the event of his constructive termination he is to receive 2.99 times the average annual compensation he received in his best three years. That compensation includes his salary, which ranged from $1 million in 1999 to $1.5 million in each of the last two years, and his bonus, which rose from $4.3 million in 1999 to $5 million last year.
But it also includes the value of the options he received in those years. And it appears that value is to be calculated based not on what actually happened to the options but on their projected value, a figure calculated by assuming that Dynegy stock would go up 15 percent a year. That projected value was to be 3.75 times his base salary.
There was a time an assumption of 15 percent gains seemed conservative. Dynegy stock rose 122 percent in 1999 and 361 percent in 2000. But in 2001 it fell 55 percent, and it is down 67 percent so far this year. The shares now trade just about where they did exactly three years ago.
As a result, the 1.7 million options that Mr. Watson received under his contract through last December had exercise prices ranging from $23.85 to $47.19, figures well above the current market price. Those options will not expire until 2011, however, so he could still make money from them if the stock recovers under new management. As part of his severance agreement, all the options can be exercised at any time he wishes.
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