By Tom Hals
WILMINGTON, Delaware (Reuters) - A Delaware court is likely to rule by Friday on whether Dynegy Inc's <DYN.N> proposed debt restructuring should be put hold, according to a Dynegy spokesman.
Dynegy, the third-largest U.S. independent power producer, confirmed that the judge made his plans known during a late Monday hearing in Delaware's Chancery Court.
Judge Donald Parsons heard arguments after New Jersey-based energy company Public Service Enterprise Group <PEG.N> on Friday requested a temporary restraining order to prevent Dynegy from proceeding with a reorganization and a $1.7 billion refinancing.
PSEG argued the restructuring would prevent it from enforcing guarantees on financing it provided to Dynegy.
Attorneys for both parties and a spokesman for PSEG did not return a call for comment.
Dynegy has been trying to refinance its debt load after two failed takeover offers -- including one from Carl Icahn earlier this spring. The company warned in March that it might have to file for bankruptcy as it dealt with nearly $5 billion in debt.
Icahn and hedge fund Seneca Capital -- Dynegy's largest shareholders -- are overseeing its restructuring, which has included replacing management and board members.
Earlier this month Dynegy proposed splitting off two entities, one holding its coal assets and one for its natural gas units, with separate financing for each.
PSEG's financing stems from a 2001 deal in which PSEG bought two New York power facilities, Roseton OL LLC and Danskammer OL LLC, from Dynegy for $920 million and immediately leased them back to Dynegy under long-term agreements.
About $790 million remains outstanding on the leases, according to court documents.
The two units do not generate enough cash to meet the lease payments, and as a result Dynegy must take money from other Dynegy operations.
However, those other operations are being transferred to the newly created "bankruptcy-remote" entities. PSEG said in court papers that in the "likely event" of a default on the Roseton and Danskammer leases, PSEG's right to enforce its guaranty would have little value.
Dynegy has also been sued in New York state court over its planned restructuring. Creditors in that case argue the overhaul puts assets beyond their reach and increases the risk the company will default.
The New York case is on hold until the Delaware case has been resolved.
The cases are LibertyView Credit Opportunities Fund LP et al v. Dynegy Holdings Inc, New York State Supreme Court, New York County, No. 651998/2011, and Roseton OL LLC and Danskammer OL LLC v Dynegy Holdings Inc, Delaware Chancery Court, No. 6689.
(Additional reporting by Caroline Humer in New York; Editing by Steve Orlofsky)