Dynegy Inc. to potentially merge with Dynegy Holdings within bankruptcy case

Dynegy Holdings LLC, an affiliate of Dynegy Inc. (NYSE: DYN) that has been in Chapter 11 bankruptcy protection since last November, told the court June 18 that it expects parent Dynegy Inc. to join it in bankruptcy, with Dynegy Holdings and Dynegy Inc. to merge, reorganize, and emerge as Dynegy Inc.

The June 18 motion filed with the U.S. Bankruptcy Court for the Southern District of New York asks for authorization of the merger of Dynegy Holdings into Dynegy Inc. Dynegy Inc. had made no formal, public announcement as of June 21 on plans to join Dynegy Holdings in bankruptcy. Dynegy Inc. made a June 19 Form 8-K filing with the SEC about the June 18 court filings, but again didn’t indicate it was certain to enter bankruptcy along with Dynegy Holdings.

On June 1, the court entered a settlement order that resolved a number of material issues in the Chapter 11 cases of Dynegy Holdings and subsidiary companies, which control power generating assets in New York. On June 8, Dynegy Holdings filed the Third Amended Chapter 11 Plan of Reorganization for Dynegy Holdings proposed by Dynegy Holdings and Dynegy Inc. An amendment of that third plan was filed on June 18, along with an amended disclosure statement.

Under the settlement agreement, Dynegy Inc. was granted an unliquidated allowed administrative claim that is to be assigned or otherwise transferred to a trust or otherwise transferred in an efficient manner for the benefit of Dynegy’s stakeholders. In addition, the agreement contemplates the merger of DH with and into Dynegy, with Dynegy as the “Surviving Entity.”

Dynegy, the parent, will file a petition with this court for Chapter 11 relief, the June 18 filing noted. “However, Dynegy has not yet made any determination, or been authorized by its board of directors, to file a chapter 11 petition and, if ultimately so determined and/or authorized to do so, it has not been determined when such filing would occur,” the June 18 filing said.

“In order for DH and Dynegy to have maximum flexibility to implement the Merger (subject to the terms and conditions described herein), the Movants believe it is necessary to have explicit authorization, as soon as practicable, to effect the Merger as contemplated by the Settlement Agreement on or prior to the Effective Date, subject to the terms and conditions set forth in the Plan, Settlement Agreement, Plan Support Agreement and herein,” said the June 18 motion. “Under Delaware law, a merger of the two entities would result in the extinguishment of claims by and between such entities. Accordingly, by operation of Delaware law, it is possible that upon occurrence of the Merger, the Dynegy Administrative Claim (held by Dynegy against DH) could be deemed to be extinguished, thereby eliminating any recovery for the intended beneficiaries of the Dynegy Administrative Claim. To avoid this result, Dynegy must make the Assignment prior to the Merger. The Movants therefore believe that the flexibility to effectuate the Merger prior to the Effective Date and to effectuate the Assignment of the Dynegy Administrative Claim prior thereto, will only redound to the benefit of DH’s estate, and provide increased certainty regarding the confirmation process. The relief requested herein will also give DH and the other Settlement Parties, including Dynegy, the necessary flexibility to meet the milestones set forth in the Plan Support Agreement, which, if not met, provide certain parties to the Plan Support Agreement with the right to terminate such agreement or, in certain instances, their particular obligations thereunder.”

Although there are a number of lawsuits pending against Dynegy that were filed by shareholders asserting various securities and breach of fiduciary duty claims, Dynegy believes these claims are completely without merit, and therefore Dynegy believes that these claims should not harm DH unsecured creditors with completion of the merger, the June 18 filing said.

In particular, said the filing, the claims alleging securities law violations in connection with Dynegy’s public filings at the time of the 2011 CoalCo transfer (related to several coal-fired power plants in Illinois that are not in bankruptcy) are bound to fail because: the federal securities laws apply only to misrepresentations of fact, and there can be no reasonable dispute that Dynegy disclosed all material facts regarding the CoalCo transfer; the plaintiff in such securities litigation has not pleaded any particularized facts supporting the required “strong inference” of scienter as necessary to state a claim, and cannot demonstrate any reason why Dynegy would have been motivated to make such misrepresentations such as a concrete benefit it could receive from an inflated stock price; the plaintiff’s overarching claim that Dynegy failed to disclose that the CoalCo transfer was a fraudulent conveyance is completely without merit, as Dynegy cannot be liable for a failure to disclose a legal conclusion (which it disputes) that has never been reached; and the plaintiff cannot prove loss causation, which requires him to prove that the stock losses he allegedly suffered were foreseeable and caused by the allegedly fraudulent statements.

Bankrupt Dynegy companies still operate two plants in New York

Dynegy Inc. and DH are holding companies that conduct their business operations through their direct and indirect subsidiaries, including the other debtors. The primary business of the company is the production and sale of electric energy, capacity and ancillary services from a fleet of 10 operating power plants in six states totaling approximately 8,464 MW of generating capacity. The other debtors’ direct operations consist of only two of these plants – at Dynegy Danskammer LLC and Dynegy Roseton LLC in New York – which have a combined generating capacity of 1,693 MW.

Dynegy Danskammer owns the 185-acre site in Newburgh, N.Y., on which the Danskammer plant is located, adjacent to the Roseton site. There are six units at Dynegy Danskammer’s facility – four of which are owned by Dynegy Danskammer, and two of which are leased by Dynegy Danskammer from Danskammer OL LLC, an indirect subsidiary of Public Service Enterprise Group Inc. (NYSE: PSEG), an unaffiliated entity. Dynegy Danskammer owns units 1, 2, 5, and 6 at the plant. Units 1 and 2 are peakers with a net capacity of 129.7 MW. They use natural gas and fuel oil. Units 5 and 6 are emergency diesel generators with net capacities of 2.5 MW each and currently are not in operation and are not connected to the power grid. Dynegy Danskammer leases Units 3 and 4, which are baseload units that run at all times and have a net capacity of 373.4 MW. They use coal and natural gas as their primary fuels.

Dynegy Roseton owns the 195-acre site in Newburgh on which the Roseton facility is located. Dynegy Roseton operates the two units at the facility. It leases these units from Roseton OL LLC, an indirect subsidiary of PSEG. Both units are peakers with a net capacity of 1,200 MW. They use natural gas and fuel oil as their primary fuels.

These leased facilities are connected to the Northeast Power Coordinating Council and compete primarily in the New York wholesale market, operated and maintained by the New York Independent System Operator (the NYISO), although the power generated at the Danskammer and Roseton facilities may be sold into PJM, as well as to New England, Quebec and Ontario.

The bankruptcy court in December 2011 approved a Dynegy Holdings motion to reject these plant leases as being too burdensome for the Dynegy companies in bankruptcy.

“The Debtor Lessees have remained in physical possession and have operated the Leased Facilities for the benefit of the PSEG Entities and the Lease Certificate Holders in order to comply, to the extent required, with applicable non-bankruptcy rules and regulations in connection with the turnover of the Leased Facilities, pending receipt of federal and state regulatory approval for the turnover of the Leased Facilities,” said the amended disclosure statement filed with the court by Dynegy Holdings on June 18. “Specifically, section 203 of the [Federal Power Act] requires that public utilities such as the Debtor Lessees obtain prior authorization from FERC before changing control of facilities such as the interconnection facilities that connect with each of the Leased Facilities. Section 70 of the New York Public Service Law similarly requires that the Owner Lessors obtain regulatory approval from the [New York Public Service Commission] before taking control of the Leased Facilities.”

Plans were afoot to convert Danskammer coal units to natural gas

The disclosure statement noted that new environmental mandates impacting the Danskammer coal units were a reason the Dynegy companies needed to seek bankruptcy. “In particular, the Lease Documents required that Dynegy Danskammer comply with newly enacted environmental regulations mandating upgrades to the Danskammer Facility by 2014 at a cost of approximately $375 million. While these capital costs could have been avoided by completely switching the plants to natural-gas operations, conversion would have required additional upgrades to the gas delivery systems at the Leased Facilities (which would have entailed capital costs in an amount approaching $10-15 million) and, in any event, would have significantly diminished the amount of revenue generated by the Leased Facilities. Dynegy Roseton would likewise have needed to make substantial capital expenditures pursuant to the Lease Documents to upgrade the Roseton Facility to comply with a number of federal and state regulations scheduled to become effective in the next few years. These ongoing expenses would have exacerbated the economic burden to the Debtors caused by the Lease Documents.”

The disclosure statement also indicated that PSEG doesn’t plan to operate these plants and indeed wants to sell its interests in them. “Pursuant to the Settlement Agreement, the Debtors, with the cooperation of the PSEG Entities, will use their commercially reasonable efforts to sell the Roseton and Danskammer power generation facilities (including all of the power generation units and other structures and equipment, the related land and all other assets related to the operation thereof) (all such assets together, the ‘Facilities’), including all of the Debtors’ and the PSEG Entities’ interests in the Facilities, as soon as reasonably practicable; provided, that neither the Debtors nor the PSEG Entities will execute a binding sale agreement or related ancillary agreements with respect to the Facilities (or any portion thereof) without the prior written consent of the Lease Trustee and the Creditors’ Committee and without prior consultation with the Consenting Senior Noteholders, which consent and consultation is not to be unreasonably withheld, delayed, or conditioned.”

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.