Dynegy

(DYN)

has agreed to pay former CEO Chuck Watson $22 million -- more than twice what the company earned last quarter -- to settle a severance dispute.

In a quarterly report filed on Wednesday, the company said it had decided to make the payment after losing a similar arbitration battle with former President Steve Bergstrom. Bergstrom won the $10.4 million he was seeking -- plus attorneys fees, costs and interests -- when a three-person arbitration panel sided with him in April.

Now, Watson is in line to receive all but $6.7 million of the $28.7 million he wanted by settling his case immediately. Meanwhile, former CFO Rob Doty continues to pursue $3.4 million in severance pay through arbitration proceedings scheduled to begin in November.

"Mr. Doty's agreement is subject to interpretation," the company stated in its regulatory filing. "And we maintain that the amount owed is substantially lower than the amount sought."

Still, Watson -- viewed as responsible for both the stunning rise and fall of Dynegy -- is set to collect some $12 million more than the company earned in the second quarter. Moreover, the company now says that its latest ongoing earnings actually were lower than first reported.

In a press release issued late Wednesday, Dynegy revealed that it had improperly classified a $13 million tax benefit as income from ongoing operations instead of discontinued operations in its latest earnings release. Although the change leaves net income unchanged at $10 million, it lowers earnings from continuing operations -- a number closely watched by investors -- by one-third to 6 cents a share.

The news came just two days after at least one analyst, Christopher Ellinghaus of Williams Capital, had declared Dynegy's second-quarter earnings "surprisingly good." Although he also described Dynegy's future guidance as "complicated," he went on to raise his own 2004 estimate for the company at that time.

To be fair, Dynegy said on Wednesday that the tax reclassification would have no impact on its earnings guidance for 2004. It still expects to earn between 3 cents and 8 cents a share this year.

Ellinghaus was already banking on Dynegy's profits to come in near the low end of that range when the company updated its numbers on Wednesday.

Dynegy's stock slipped 3 cents to $3.99 prior to Wednesday's announcement.