Dynegy Transfer of Coal Assets Was Fraudulent, Examiner Says

Dynegy Inc. closed at a record low after a court-ordered investigation found that its purchase of coal-fired power plants from a unit that later filed for bankruptcy was fraudulent and harmed creditors.

Dynegy plunged 36 percent to 76 cents in New York Stock Exchange composite trading, bringing the past year’s decline to 86 percent. The Houston-based company put subsidiary Dynegy Holdings LLC and four of its units into bankruptcy in November after moving ownership of the plants to the parent.

“Throughout the planning and execution of the prepetition restructuring, the Dynegy Inc. board favored paths that benefited Dynegy Inc. and its stockholders to the detriment of Dynegy Holdings and its creditors,” examiner Susheel Kirpalani said in report filed today in U.S. Bankruptcy Court in Poughkeepsie, New York.

Dynegy Holdings’ $1 billion of 8.375 percent debt due 2016 rose 4.25 cents to 69 cents on the dollar at 2:20 p.m. New York time, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Kirpalani, a lawyer at Quinn Emanuel Urquhart & Sullivan LLP, was appointed in January to investigate the pre-bankruptcy reorganization. Dynegy put the units into Chapter 11 court protection with a restructuring agreement backed by a group of bondholders including Franklin Advisors Inc. and Avenue Capital Group, according to court documents.

The bankruptcy filing came after bondholders sued the company over the reorganization, saying it moved assets out of their reach to benefit shareholders of the Dynegy parent, including billionaire Carl Icahn.

The examiner concludes that the conveyance of CoalCo to Dynegy Inc. was an actual fraudulent transfer,” Kirpalani said in the report. He was selected by the U.S. Trustee, an arm of the Justice Department that oversees bankruptcies.

Dynegy has proposed swapping debt for preferred shares that would convert to common stock at the end of 2015, effectively giving the shareholder-elected board four years to turn around the money-losing power producer, Chief Executive Officer Robert Flexon said in an interview at the company’s Houston office yesterday, before the examiner filed his report.

“This is a significant setback for Dynegy shareholders,” Joseph DeSapri, a credit analyst for Morningstar Investment Services, said of the report in a telephone interview. “It represents a potential pick-up in value for bondholders.”

Morningstar rated Dynegy shares three stars out of a possible four as of yesterday. DeSapri doesn’t own the stock.

As a result of the coal transaction, half of the revenue- generating assets of Dynegy Holdings were no longer available to satisfy creditor claims, U.S. Bank NA, which represents noteholders under sale-leaseback transactions at two Dynegy facilities, said in court papers.

U.S. Bankruptcy Judge Cecelia Morris in December agreed to to U.S. Bank’s request for an examiner and ordered an “unfettered investigation” into the restructuring. U.S. Bank’s request was supported by Appaloosa Management LP and the committee representing unsecured creditors.

Dynegy had opposed naming an examiner, saying it was an attempt to gain negotiating leverage over the company.

The boards of both Dynegy and Dynegy Holdings “take the examiner’s findings seriously and intend to review the full report, once it is made available, to determine its impact,” the company said today in a statement.

Katy Sullivan, a Dynegy spokeswoman, declined to comment further in a telephone interview today, saying the company’s lawyers haven’t yet been able to read the entire report.

Dynegy is the fourth-largest U.S. independent power producer by revenue, according to data compiled by Bloomberg. Its coal unit owns and operates six plants in Illinois with a combined capacity of 3,132 megawatts, according to the company website. That’s enough to power 2.5 million average U.S. homes, based on Energy Department data.

Independent power producers don’t own power lines and get no revenue from state or federally regulated rates. NRG Energy Inc., based in Princeton, New Jersey, is the largest U.S. independent power producer by sales, followed by Calpine Corp. and GenOn Energy Inc. Both are based in Houston.