Nov. 4, 2002 — The Federal Energy Regulatory Commission (FERC) has approved a stipulation and consent agreement with Enron unit Transwestern Pipeline Co.
The Oct. 31 agreement states that the $550 million loan Transwestern arranged in November of 2001 was improperly conducted and its costs cannot be passed along to ratepayers.
The agreement resolves only those issues of fact and law as discussed in the commission’s August 1, 2002 Order to Respond issued concerning possible violations of the commission’s regulations under Part 201 of the Uniform System of Accounts governing interstate pipelines,18 C.F.R. Part 201 (2002).
The Order to Respond directed Transwestern to provide, within thirty days, written responses stating why the commission should not find that each company:
(1) violated the General Instructions-Records under Part 201 of the Uniform System of Accounts by failing to maintain written cash management arrangements with their parent, Enron Corp.;
(2) entered into imprudent loans, the proceeds of which were transferred to Enron shortly before Enron filed for bankruptcy;
and (3) should be prohibited from passing costs arising from such loans and arrangements on to ratepayers after settlement rates now in effect expire. On September 3, 2002, Transwestern submitted its Response to the commission.
Under the agreement, Transwestern and its parent Enron will comply with the provisions of the Final Rule regarding written cash management practices resulting from the commission’s Notice of Proposed Rulemaking, Regulation of Cash Management Practices, in Docket No. RM02-14-000, issued on August 1, 2002.
Transwestern will not include the costs associated with the $550 million loan entered into on November 13, 2001, with Citicorp North American, Inc. and JP Morgan Chase Bank as co-administrative agents, nor the costs of any successor loans used to retire the initial loan obligations in any future rate proceedings before the commission.
Specifically, Transwestern will not include the loan itself, the interest cost of the $550 million loan, or the cost of acquiring such loan or any successor loan(s) used to retire the $550 million debt, in any future commission rate proceedings.
Also, Transwestern agreed to file with the Chief Accountant conforming changes to its books and records maintained under the Uniform System of Accounts and its FERC Form No. 2 that reflect, for regulatory accounting purposes, the appropriate treatment of the $550 million loan as well as any successor loan(s) used to retire that debt.
On November 1, 2001, Enron issued press releases announcing the written commitments
for an additional $1 billion in a line of credit from Citicorp North America, Inc. and JP Morgan Chase Bank to be supported by loans executed with Transwestern and Northern.
The press releases stated that the proceeds were to be used by Enron to supplement short term liquidity and to refinance maturing obligations. The Transwestern credit agreement was structured such that the proceeds of Transwestern’s borrowing would be loaned to Enron, with the banks holding a secured interest in Transwestern’s note receivable from Enron.
The proposed $550 million loan to Transwestern was structured so that, to the extent Enron developed future credit rating difficulties, Enron’s access to cash from Transwestern under a separate Cash Management Agreement (between Enron and Transwestern) would be subject to limitations such that inter-company loans or advances would be prohibited in the event of continuing default by Transwestern or when the sum of Transwestern’s unrestricted cash and any unutilized borrowing capacity under the $550 million loan is less than $10 million or when Enron is no longer investment grade.
On November 13, 2001, the agreements between Citicorp, JP Morgan and Transwestern were executed. These agreements were approved by Transwestern’s board of directors consisting of three Transwestern senior executives including its chief executive officer, senior vice president and chief commercial officer and senior vice president and chief financial officer.
Simultaneously, on November 13, 2002, Enron executed two subordinated promissory notes in favor of Transwestern for $137.5 million and $412.5 million.
The $550 million in credit extended to Transwestern was comprised of the $412.5 million in cash proceeds to Transwestern, $402.5 million of which was, in turn, loaned by Transwestern directly to Enron and Transwestern’s assumption of a pre-existing $137.5 million Enron obligation to the banks.
Enron’s promissory notes to Transwestern provided that they are subordinated to prior payment of all senior indebtedness upon dissolution, liquidation, or reorganization for the benefit of creditors of Enron. Enron borrowed the full amount of the $550 million face value of these notes from Transwestern, less $10 million retained by Transwestern as supplemental working capital. None of the $540 million was used to provide or support any of Transwestern’s jurisdictional services.
Transwestern duly recorded the loan in accordance with the Uniform System of Accounts under Part 201 of the commission’s regulations. The recordation, however, was made to account 231, Notes payable. This account does not affect the jurisdictional rate base of Transwestern. Thus, none of the principal amount of the $550 million loan is included in those accounts of Transwestern that make up Transwestern’s jurisdictional rate base.
Further, Transwestern’s jurisdictional rates do not now reflect any costs associated with the $550 million loan and it is intended by this agreement, as specified below, that no such costs will be reflected in future rates.
After Enron filed for Chapter 11 bankruptcy on December 2, 2001, Transwestern made adjustments under the Uniform System of Accounts to take into account the Enron bankruptcy and its effect on the Transwestern loans to Enron.
As a result, Transwestern’s management reserved the amount of the loan by charging Account 426.5, Other deductions, which was reflected in retained earnings. Thus, the accounting for the $540 million loan appropriately reflects the fact that the loans made by Transwestern to Enron were no longer deemed by Transwestern to be recoverable.
Accordingly, because of the $540 million offsetting charge against Transwestern’s retained earnings, Transwestern’s principal shareholder, Enron, has borne this reduction and no longer had these amounts of retained earnings available to it as a source of equity value, dividends or other capital asset.
Transwestern neither admits nor denies any violation of the commission’s Uniform System of Accounts and Transwestern neither admits nor denies that any of its loans were entered into imprudently. However, Transwestern, the Chief Accountant, and enforcement agree as follows:
Transwestern agrees that it will comply with the Final Rule regarding written cash management practices resulting from the commission’s Notice of Proposed Rulemaking, Regulation of Cash Management Practices, in Docket No. RM02-14- 000 issued August 1, 2002.
Transwestern agrees that it will not include the costs associated with the $550 million loan entered into on November 13, 2001 with Citicorp North and JP Morgan as collateral trustees, and Citicorp North American, Inc. and JP Morgan Chase Bank as co-administrative agents, in any future rate proceedings before the commission.
Specifically, Transwestern will not include the principal of the loan itself, the interest cost of the $550 million loan, or any associated expenses incurred in acquiring such loan, in any future Commission rate proceedings. These costs are identified in the accounting entries set out in Attachment A to the Agreement, available on the FERC web site at http://www.ferc.gov.
Transwestern agrees that it will identify those amounts by footnote in its 2002 Form No. 2 filing with the commission. Transwestern further agrees that all existing balances and year to date 2002 financial activity will be reclassified immediately upon the commission’s approval of the Agreement and that Transwestern will, within 15 days of the commission’s approval of this Agreement, submit to the Chief Accountant a filing that reflects such changes to its records maintained pursuant to Part 201 of the Uniform System of Accounts.
The $550 million loan is structured as a revolving line of credit that expires and must be paid in full on or before November 8, 2002 and, therefore, will not be included in the capital structure of Transwestern after November 2002.
To the extent Transwestern retires the $550 million loan with new short-term (less than 365 days) financing vehicle, Transwestern agrees that it will reflect such refinancing by reclassifying and segregating the loan components in specified sub-accounts as follows: (a) Principal to Account 231.1 Note Payable; (b) Deferred Expenses to Account 181.1; (c) Interest Expense to Account 431.1; and (d) Amortization of Deferred Expenses (legal and bank fees) to Account 428.2.
To the extent Transwestern retires the $550 million loan with a new long-term (greater than one year) financing, Transwestern agrees that it will reflect such refinancing by segregating and reclassifying the loan components in sub-accounts specified above except that (a) Principal to Account 224.1 (other long-term debt) in lieu of Account 231.1; and (b) Interest Expense to Account 427.1 (interest on longterm debt) in lieu of Account 421.1.
Transwestern further agrees that within 15 days of the execution of such successor financing arrangements, Transwestern shall submit to the Chief Accountant a filing that reflects such changes to its records maintained pursuant to Part 201 of the Uniform System of Accounts.
Transwestern further agrees that it will identify those reclassified and segregated amounts attributable to such successor financing arrangements in the accounts specified above by footnote in its 2002 Form No. 2 or any succeeding Form No. 2 filed with the commission as long as such successor financing arrangements remain effective.
Notwithstanding the provisions set forth in Paragraph 11, the commission reserves the right to determine, in any future NGA Section 4 rate proceeding, whether the costs associated with any future refinancing of the $550 million loan is just and reasonable.