Dynegy works out a deal that partially settles bankruptcy tiff

Dynegy Inc. (NYSE: DYN) announced April 4 that it has reached an agreement in principle with creditors holding over $2.5bn of claims against Dynegy’s bankrupt subsidiary, Dynegy Holdings LLC (DH).

The terms of the deal will be implemented through a settlement agreement to be filed in DH’s Chapter 11 bankruptcy case, and in amendments to DH’s Chapter 11 plan, which would be subject to a formal creditor vote and confirmation by the bankruptcy court.

Under the agreement in principle:

  • DH’s unsecured creditors would receive common equity in the reorganized company in lieu of the new senior secured notes and preferred stock contemplated by the current plan;
  • the cash to be distributed to creditors under the revised plan would be reduced to $200m;
  • and all disputes relating to the Roseton and Danskammer power plant leases would be resolved by awarding US Bank, as trustee for the trust certificates issued in connection with the leases, a fixed allowed unsecured claim.

Parties to the proposed agreement include an ad hoc group of holders of DH’s senior notes, PSEG, US Bank and certain holders of the lease notes. The agreement in principle does not include any holders of DH’s $200m of subordinated capital income securities due 2027.

“This agreement in principle recognizes the continuing decline in natural gas prices and the associated impact this has on our business while also addressing all of the complex issues raised by the examiner’s report regarding potential claims between the DH estate and Dynegy, which may otherwise have taken years to resolve,” said Robert Flexon, President and CEO of both Dynegy and DH. “We are pleased that the parties have taken a pragmatic approach and have the company back on track to put the DH Chapter 11 case behind it during the third quarter of 2012.”

In December 2011, the Energy Holdings unit of Public Service Enterprise Group (NYSE: PEG) and Dynegy reached a settlement resolving disputes about DH’s rejection of its leases at Roseton and Danskammer. The settlement agreement assigns to Dynegy the PSEG rights to certain future payments or distributions related to the Dynegy leases, and also resolves PSEG claims under a Tax Indemnity Agreement with DH, said PSEG in its Feb. 27 annual Form 10-K report. The bankruptcy court approved the settlement agreement and DH’s rejection of the Dynegy leases by an order that became effective on Dec. 30, 2011.

New deal solves many old issues

The new agreement in principle, which remains subject to documentation that the parties intend to prepare and file during the month of April and to bankruptcy court approval, includes the following key elements:

  • All potential claims and causes of action between DH and Dynegy, including those arising with respect to the Sept. 1, 2011 CoalCo transaction, would be settled and released. The recovery of DH’s creditors would be fully supported by the value of both CoalCo and GasCo, neither of which is in bankruptcy. CoalCo is basically Dynegy’s coal-fired assets in Illinois and GasCo is Dynegy’s gas-fired plants.
  • DH’s unsecured creditors would receive common equity representing a 99% stake in the reorganized company at emergence. DH claims participating in this recovery would include those arising under DH’s senior notes, which currently total about $3.4bn, PSEG’s $110m tax indemnity claim and the lease notes’ guaranty claim against DH, which would be allowed in the amount of $540m. All distributions to holders of claims arising under DH’s subordinated notes would be subject to turnover under the contractual subordination provisions in the subordinated note indenture.
  • Dynegy would receive a claim for the benefit of its stockholders, which under the amended plan would be entitled to receive 1% of the fully-diluted common stock of the reorganized company, and 5-year warrants to purchase 13.5% of the common stock of the reorganized company (on a fully-diluted basis) to be exercisable at an equity value for the reorganized company of $4bn. Dynegy’s stockholders will not receive or retain any other property or shares in Dynegy or DH under the settlement.
  • The lease notes’ claims will also be allowed against the Roseton and Danskammer debtors and will be entitled to 50% of the proceeds from the sale of their assets, provided that their full recovery from all sources may not exceed $571m. The other DH unsecured creditors will be entitled to the remaining 50% of proceeds.
  • The cash distributed to DH unsecured creditors would be reduced to $200m, with the remaining cash balances being retained by the reorganized company for general corporate purposes.
  • All claims and causes of action against the directors, officers, employees, attorneys and advisors of Dynegy and DH would be released to the fullest extent permitted. Dynegy, DH, and the settling creditors will also exchange mutual releases.

The parties are currently working on definitive documentation that will implement the proposed terms. The parties are also continuing to engage in discussions with other creditors, including the holders of the subordinated notes, to try and get as much consensus as possible on the amended DH plan.

In November 2011, Dynegy Holdings and four affiliated companies filed petitions in the U.S. Bankruptcy Court for the Southern District of New York seeking relief under chapter 11 of the United States Bankruptcy Code.

Incidentally, on March 23, bankruptcy Judge Cecelia Morris signed an order rejecting two coal contracts that had been held by Dynegy Danskammer LLC with Patriot Coal Sales LLC, a unit of Patriot Coal (NYSE: PCX). Dynegy said those contracts, both of which were signed last year, were no longer economic. One contract covered only the first quarter of this year, and the other only the May-June period this year, so apparently minimal tons were involved.

Dynegy’s subsidiaries produce and sell electric energy, capacity and ancillary services in key U.S. markets. The Dynegy Power (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 (CoalCo) portfolio consists of approximately 3,132 MW of primarily coal-fired baseload power plants. The Dynegy Northeast Generation portfolio consists of about 1,693 MW from two power plants, Roseton and Danskammer, which are primarily gas-fired peaking and baseload coal 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.