Dynegy calls report 'flawed,' denies fraudulent transfer conclusion

By Caroline Salls

Pittsburgh, March 16 - Dynegy Inc. has responded to the examiner's report filed with the U.S. Bankruptcy Court for the Southern District of New York, saying it disagreed with the examiner's conclusions and that it believes the report was flawed, according to a company news release.

"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," president and chief executive officer Robert C. Flexon said in the release.

As previously reported, the examiner conducted a 60-day review of the company's pre-bankruptcy restructuring transactions and concluded that many of the elements of Dynegy's strategy, including the ring-fencing of CoalCo and GasCo and related financings, were proper.

The company said the examiner's criticism was directed exclusively at the transfer to Dynegy Inc. of CoalCo from Dynegy Gas Investments, a debt-free wholly owned subsidiary of Dynegy Holdings, in exchange for $1.25 billion.

Company response

Dynegy said it disagrees with this criticism for numerous reasons, including the following:

• The company said the examiner did not actually determine whether Dynegy Holdings was insolvent, but assumed insolvency and "ignored critical evidence to the contrary."

The company said its directors fully believed that Dynegy Holdings was solvent at the time of the transfer of CoalCo, and the consolidated company at that time had more than $1 billion in liquidity, about $570 million in equity market capitalization, financial forecasts demonstrating its ability to meet its debts for the foreseeable future, the ability to raise additional capital through new credit lines and asset sales and no significant debt maturities until 2015;

• The examiner's conclusion of a fraudulent transfer is incorrect. Dynegy said the documents and other evidence regarding the CoalCo transfer demonstrate that there was no intent to hinder or delay creditors.

The company said the transaction was done in support of an exchange offer intended to reduce the holding company's debt for the benefit of creditors while offering a more secured investment for those creditors who participated in the exchange.

Once the tender had failed, the company said it quickly entered into a restructuring support agreement with Dynegy Holdings creditors that would unwind the CoalCo transfer and provide creditors a more secured interest in both CoalCo and GasCo.

• 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," the company said in the release.

Dynegy said the looming debt default of a senior credit facility as of Sept. 30, 2011 would have kept the company from continuing in business without the refinancing that occurred in August 2011.

In addition, the company said it had to confront its overleveraged situation, a significant turnover of officers and directors and business complexities, "all of which required thoughtful and immediate action, which the board carried out."

Dynegy said the directors used their best business judgment and retained internationally recognized advisers to determine the right course of action that preserved value for the company's stakeholders and ensured it was done in the proper manner; and

• The report's conclusions depend on an inconsistent application of legal analysis.

Specifically, the company said the position that Dynegy Inc., Dynegy Holdings and Dynegy Gas Investments should all be treated as a single entity is critical to the conclusion that the Dynegy Inc. directors breached their fiduciary duties.

"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," the company said in the release.

"Additionally, there could be no breach of fiduciary duties at the DH level because it would be disregarded in this legal analysis.

The company said the examiner's report is non-binding and "is not the conclusion of any court."

Dynegy is a Houston-based producer and seller of electric energy, capacity and ancillary services. The company and four subsidiaries filed for bankruptcy on Nov. 7. The Chapter 11 case number is 11-38111.

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