Updated from 3:50 p.m. EDT

Dynegy

(DYN)

rose 4.2% as investors evidently bet that the replacement of CEO Chuck Watson with an executive from

ChevronTexaco

(CVX) - Get Report

meant the oil giant wasn't abandoning the troubled energy trader.

ChevronTexaco Vice Chairman Glen Tilton was named to succeed Watson as interim chairman, while Dynegy board member Daniel Dienstbier was named interim CEO. The company said on a conference call that its chief operating officer, Stephen Bergstrom, was a candidate to permanently succeed Watson.

Tilton and two other ChevronTexaco executives had already been serving on Dynegy's board.

Investors appeared optimistic about the interim appointment of someone from ChevronTexaco, which owns roughly a quarter of Dynegy.

"My guess is that the news has people hoping that ChevronTexaco will put up more equity to protect their investment in Dynegy," said Dot Matthews, an analyst at independent research firm, CreditSights. "People have been worried about their involvement. Perhaps this makes them more comfortable."

But Tuesday's news comes amid concerns that Dynegy's credit rating would be downgraded again -- like fellow energy trader

Williams

(WMB) - Get Report

was late Tuesday -- an event with potentially dire implications for a company whose investment-grade rating is important to risk-averse trading partners. "It doesn't necessarily precipitate a downgrade," said Matthews. "But they were headed for one anyway."

Dynegy is increasingly enmeshed in scandal. Over the weekend it acknowledged receiving subpoenas from a U.S. Attorney's office related to its use of so-called "round-trip" trades to burnish volume.

Round-trip trades, in which power is simultaneously bought and sold at the same price, have caused Reliant and parent

Reliant Energy

(REI) - Get Report

to restate the first quarter of 2001, and cost

CMS Energy

(CMS) - Get Report

chairman William McCormick his job on Friday.

In early May, the Securities and Exchange Commission opened a formal probe into a previously reported five-year gas supply contract known as "Project Alpha." That deal created an $80 million tax benefit in 2001 and resulted in about $300 million in net cash flow during 2001, amounts by which the company last week agreed to restate its earnings last week.

Standard & Poor's currently rates Dynegy's corporate credit two notches above junk status, while Moody's Investors Service places its debt a rung above junk status.

After the closing bell, Standard & Poor's cut its credit rating on Williams to two notches above junk status after the company laid out a proposal to shore up its balance sheet by $3 billion in the next year. In addition, S&P took Williams' unsecured rating to triple-B-minus from triple-B, the lowest investment grade rating. In a release, S&P said Williams' plan was subject to "substantial execution risk."

Williams said it wasn't surprised by the move, but that it hoped the new initiatives would resolve lingering credit issues. In after-hours trading on the Instinet platform, Williams was down 2% at $16.77.