Dynegy Holdings LLC Bonds (DYN.HQ)

[Enterprising Investor]

Judge Confirms Dynegy's Plan to Exit Bankruptcy (9/05/12)

By JOSEPH CHECKLER
A judge Wednesday cleared Dynegy Inc. to exit bankruptcy mostly in the hands of its unsecured creditors, an anticlimactic but important step toward the exit door of a tumultuous Chapter 11.

Judge Cecelia G. Morris of the U.S. Bankruptcy Court in Poughkeepsie, N.Y., confirmed the plan after forcing Dynegy's lawyers to put witnesses on the stand to satisfy her concerns that the energy company wasn't providing enough details about its plan.

"Let's make a real record here," Judge Morris said at one point in the hearing. Her biggest concern, as is common in bankruptcy cases, was whether elements of the plan improperly released Dynegy and its executives and directors from legal action being taken against them later.

White & Case LLP's J. Christopher Shore, a lawyer for Dynegy, told Judge Morris that while the Dynegy bankruptcy wasn't the hardest he has ever worked on, it was near the top of the list.

"There were some dark periods," Mr. Shore said, alluding to the independent examiner's report that nearly threw the case into chaos, as well as an "essentially unprecedented collapse in natural gas prices" that hurt the company's core coal business.

Dynegy spokeswoman Katy Sullivan said, "The plan confirmation marks a significant milestone in Dynegy's restructuring." She added, "The plan provides the foundation for the company's future success."

Dynegy hopes to emerge from bankruptcy on or before Oct. 1, Ms. Sullivan said.

Susheel Kirpalani, whose report denounced Dynegy's prebankruptcy-filing transfer of coal assets toward equity holders and away from bondholders, was also in the courtroom Wednesday. His March report led to mediation—with himself as the mediator—that resulted in Dynegy's latest plan, which gives the company's unsecured creditors a 99% stake in Dynegy. Current Dynegy Inc. shareholders initially would receive 1%, plus warrants to potentially boost their stake to 13.5% over five years.

It includes a deal with a unit of U.S. Bancorp, USB +0.35%the representative of holders of bonds secured by leases of two Dynegy power plants. U.S. Bancorp had previously sued over the asset transfers but has agreed to drop the lawsuit in exchange for a $540 million claim plus as much as $31 million more if the two plants, called Roseton and Danskammer, are sold.

A group of subordinated note holders, who say they are owed more than $220 million, will divide among themselves about $55 million, good for about 25 cents on the dollar. As part of that settlement, two hedge funds that hold those notes will get their legal fees paid by Dynegy Holdings LLC's estate.

Dynegy's main operating subsidiary, Dynegy Holdings, filed for Chapter 11 protection in November 2011 to restructure billions of dollars in debt in bankruptcy court and get out of the two burdensome power-plant leases. The transfer of the coal-powered plants from Dynegy Holdings to Dynegy Inc. in September 2011 had left the subsidiary's bondholders owed roughly $4 billion without a claim on those plant assets.

When it put Dynegy Holdings and related subsidiaries into bankruptcy, the move hurt bondholders without affecting the parent's shareholders, eventually leading to the appointment of Mr. Kirpalani as examiner. Those shareholders include Carl Icahn, who has two seats on the company's board.

To facilitate its plan, Dynegy Inc. decided to put itself into bankruptcy in July and merged itself with Dynegy Holdings LLC. Dynegy Inc., the company said, will be the "surviving entity."

Write to Joseph Checkler at [e-mail]

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