Dynegy Inc. (DYN) reached a settlement with creditors of a bankrupt unit after a court-ordered investigation found that they were harmed by the power producer’s 2011 restructuring.
The creditors hold more than $2.5 billion in claims against the unit, Dynegy Holdings LLC, Houston-based Dynegy said in a statement today. The deal clears a path for the unit to reorganize and exit bankruptcy, Matthew Clemente, a lawyer for the company, said in court. Dynegy plunged 30 percent to 36 cents at 1:01 p.m. in New York.
A court-appointed examiner concluded in a report filed last month that last year’s shift of coal-fired power plants from the unit to the Dynegy parent was a fraudulent transfer that harmed creditors. Afterward, the U.S. Trustee, a Justice Department arm that monitors bankruptcies, asked U.S. Bankruptcy Judge Cecelia Morris in Poughkeepsie, New York, to appoint a trustee to run the units in bankruptcy.
The examiner’s report demonstrates “gross mismanagement on the part of current management,” the U.S. Trustee said in court papers. Dynegy put Dynegy Holdings and four other units into bankruptcy in November to complete a debt-restructuring accord with noteholders.
Under the creditor agreement announced today, claims that would have taken years to resolve will be settled and released, Dynegy Chief Executive Office Robert C. Flexon said in the statement. The accord requires court approval.
“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,” Flexon said.
Dynegy expects to end the units’ bankruptcy case during the third quarter, he said. Dynegy Holdings’ unsecured creditors will get 99 percent of the equity in the reorganized company, Dynegy said. The parent will get a claim on behalf of existing shareholders for 1 percent of the reorganized company’s common stock and warrants.
Dynegy is the fourth-largest U.S. independent power producer by revenue, according to data compiled by Bloomberg. Independent power producers don’t own power lines and get no revenue from state or federally regulated rates. The company posted a net loss of about $235 million in 2010 on sales of $2.32 billion as electricity prices fell.
The case is In re Dynegy Holdings LLC, 11-38111, U.S. Bankruptcy Court, Southern District of New York (Poughkeepsie).