Dynegy fires back at critical bankruptcy examiner report

Dynegy Inc. (NYSE:DYN), after several days of largely silence, said March 16 that it is “troubled and disappointed” by a bankruptcy examiner’s report that accused Dynegy of “fraudulent” transfers last year of its assets into separate companies.

Dynegy has filed a response to the examiner’s report with the U.S. Bankruptcy Court for the Southern District of New York, which is handling the chapter 11 case of Dynegy Holdings and related companies that hold Dynegy generating assets in New York. Dynegy Holdings sought bankruptcy protection in November 2011, while other parts of Dynegy, namely CoalCo and GasCo, remain out of bankruptcy. Dynegy contended that the examiner’s report, filed with the court on March 9, is not evidence, is non-binding and is not the conclusion of any court.

“Dynegy is both troubled and disappointed by the examiner’s report as we continue to believe our restructuring activities benefited all stakeholders and were conducted in the proper manner,” said Robert Flexon, Dynegy Inc. President and CEO.

The examiner conducted a 60-day review of the company’s pre-bankruptcy petition restructuring transactions and concluded that many of the elements of the company’s strategy, including the “ring-fencing” of CoalCo and GasCo and related financings, were proper. The examiner’s criticism was directed exclusively at a single transaction: the transfer of CoalCo from Dynegy Gas Investments, a debt-free, wholly-owned subsidiary of Dynegy Holdings (DH), to Dynegy Inc. (DI) in exchange for a $1.25bn undertaking on Sept. 1, 2011.

Dynegy said March 16 that it disagrees with this criticism for numerous reasons detailed in its response filed in court, including the following:

  • The report improperly assumes insolvency. The conclusions reached by the examiner are dependent on a determination that DH was insolvent at the time of the transactions. The examiner did not actually determine whether DH was insolvent, Dynegy contended. Instead, the report assumed insolvency and ignored critical evidence to the contrary. In fact, the company’s directors fully believed that DH was solvent at the time of the transfer of CoalCo, which includes coal-fired plants in Illinois. The consolidated company at that time had over $1bn in liquidity, about $570m in equity market capitalization, financial forecasts demonstrating the company’s ability to meet its liabilities for the foreseeable future, the ability to raise additional capital through new credit lines and asset sales, and no significant debt maturities until 2015, Dynegy pointed out.
  • The examiner’s conclusion of a fraudulent transfer is incorrect. The documents and other evidence regarding the CoalCo transfer demonstrate that there was no intent to hinder or delay creditors, Dynegy said. To the contrary, the transaction was done in support of an exchange offer intended to reduce DH’s debt for the benefit of DH creditors while offering a more secured investment for those creditors who participated in the exchange. Once the tender had failed, the company quickly entered into a restructuring support agreement with DH creditors that effectively would unwind the CoalCo transfer and provide DH creditors a more secured interest in both CoalCo and GasCo. In addition, the transfer of CoalCo was based on a valuation of CoalCo performed by a third party expert.
  • The report’s conclusions regarding fiduciary duties are incorrect and contrary to precedent. For a number of reasons, including the directors’ belief that DH was solvent, the fiduciary duties of DI directors and DH managers were for the benefit of shareholders, not creditors, Dynegy said. A fundamental principle of Delaware corporate law is that a board of directors cannot be second-guessed on the conduct of corporate affairs if they exercised proper business judgment. The looming debt default of the Senior Credit Facility as of Sept. 30, 2011 would have precluded the company from continuing in business absent the refinancing that occurred in August 2011. In addition, the company had to confront its over-leveraged situation, a significant turnover of officers and directors, and business complexities, including adverse swings in energy prices. The directors used their best business judgment and retained prominent advisers, including White & Case and Lazard, to determine the right course of action that preserved value for the company’s stakeholders and ensured it was done properly, Dynegy said.

  • The report’s conclusions depend on an inconsistent application of legal analysis. Critical to the conclusion that DI directors breached their fiduciary duties, is the position that DI, DH, and Dynegy Gas Investments should all be treated as a single entity instead of treating each entity as a separate company. If this approach had been consistently applied there could legally be no fraudulent transfer of CoalCo, since, in essence, DI would have transferred the coal business to itself, Dynegy contended. Also, there could be no breach of fiduciary duties at the DH level because it would be disregarded in this legal analysis. “While the company strongly disagrees with all of these findings, it believes that the examiner should have at least been consistent in the approach taken in his legal analysis,” Dynegy said.

A main pending action now in the bankruptcy case is a March 11 request by the U.S. Trustee, based in part on the findings of the examiner, to have a chapter 11 trustee named to take over operation of Dynegy Holdings from current management. That motion is due for an April 4 hearing.

Dynegy’s subsidiaries produce and sell electric energy, capacity and ancillary services in key U.S. markets. The Dynegy Power LLC (GasCo) power generation portfolio consists of approximately 6,771 MW of primarily natural gas-fired intermediate and peaking power generation facilities. The Dynegy Midwest Generation LLC (CoalCo) portfolio consists of approximately 3,132 MW of primarily coal-fired baseload power plants. The Dynegy Northeast Generation portfolio, which is involved in the bankruptcy case, consists of about 1,693 MW from two power plants which are primarily natural gas-fired peaking and baseload coal generation facilities.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.