Filed On 2/6/04 9:31am ET ˇ SEC File 70-10200 ˇ Accession Number 898080-4-64
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
2/06/04 Enron Corp/OR U-1 7:169 Leboeuf Lamb Gre..Macrae
Document/Exhibit Description Pages Size
1: U-1 Application or Declaration 48 252K
2: EX-99.1 Exhibit B-1 3 17K
3: EX-99.2 Exhibit G - Form of Notice 8 43K
4: EX-99.3 Exhibit H - List of Subsidiaries, Affiliates 65 509K
5: EX-99.4 Exhibit J-3 3 11K
6: EX-99.5 Exhibit J-4 17 34K
7: EX-99.6 Exhibit K 25 99K
File No. 70-______
United States Securities and Exchange Commission
Washington, D.C. 20549
----------------------------------------
Form U-1
Application/Declaration
Under the
Public Utility Holding Company Act of 1935
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Enron Corp. Portland General Electric
Indicated Enron Corp. subsidiaries Company
1400 Smith Street 121 Salmon Street
Houston, Texas 77002 Portland, Oregon 97204
(Names of companies filing this statement
and addresses of principal executive offices)
----------------------------------------
N/A
(Name of top registered holding company)
----------------------------------------
Enron Corp.
Attn.: Corporate Secretary
1400 Smith Street
Houston, TX 77002
(Names and addresses of agents for service)
The Commission is also requested to send copies
of any communication in connection with this matter to:
Robert H. Walls, Jr. William S. Lamb Sonia C. Mendonca
General Counsel LeBoeuf, Lamb, Greene & LeBoeuf, Lamb, Greene
David M. Koogler MacRae, L.L.P. & MacRae, L.L.P.
Assistant General Counsel 125 West 55th Street 1875 Connecticut Avenue NW
Enron Corp. New York, NY 10019-5389 Washington, DC 20009
1400 Smith Street Telephone: (212) 424-8170 Telephone: (202) 986-8195
Houston, TX 77002 Facsimile: (212) 424-8500 Facsimile: (202) 956-3321
Telephone: (713) 853-6161
Facsimile: (713) 646-3092
Facsimile (713) 646-6227
TABLE OF CONTENTS
Item 1.Description of the Proposed Transactions................................3
A.Introduction and General Request....................................3
B.Enron and its Subsidiaries..........................................4
1.The Bankruptcy Cases and the Chapter 11 Plan....................5
C.Portland General Electric Company...................................7
1.Introduction....................................................7
2.Portland General is Extensively Insulated from Enron............7
3.Sale of Portland General.......................................10
D.Prisma, CrossCountry and the Debtors' Other Assets.................10
1.Prisma.........................................................11
2.CrossCountry...................................................13
E.Other Transactions For Which Relief Is Requested...................15
1.Financing Transactions.........................................15
a.The Debtor-in-Possession ("DIP") Financing Arrangements...16
b.Pre-Petition Letters of Credit............................18
c.Enron Cash Management.....................................19
d.Portland General Cash Management Agreements...............21
e.Global Trading Contract and Asset Settlement and Sales
Agreements................................................21
f.Portland General Short-Term Financing.....................22
g Foreign Assets............................................25
2.The Sale of Non-Utility Companies..............................27
3.Dividends Out of Capital or Unearned Surplus...................28
4.New Acquisitions...............................................31
5.Simplifying Complex Corporate Structure and Dissolving
Existing Subsidiaries..........................................33
6.Rule 16 Exemptions.............................................34
7.Affiliate Transactions.........................................35
8.Tax Allocation Agreements......................................39
a.Tax Agreements with Portland General......................41
b.Tax Agreements with Non-Utility Subsidiaries..............41
9.Form U5B Registration Statement................................43
Item 2.Fees, Commissions and Expenses.........................................43
Item 3.Applicable statutory provisions and legal analysis.....................43
Item 4.Regulatory approvals...................................................43
Item 5.Procedure..............................................................43
Item 6.Exhibits and Financial Statements......................................43
Item 7.Information as to Environmental Effects................................45
2
FORM U-1
APPLICATION/DECLARATION
UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Item 1. Description of the Proposed Transactions
A. Introduction and General Request
Enron Corp., an Oregon corporation ("Enron"), a public utility holding
company,/1 on its behalf and on behalf of its subsidiaries listed in Exhibit H
(collectively "Applicants"), requests an order of the Securities and Exchange
Commission ("Commission") under the Public Utility Holding Company Act of 1935
("Act") authorizing certain financing, non-utility corporate reorganizations,
dividends, affiliate sales of goods and services and other transactions
described below to allow Enron and its subsidiaries to continue to operate their
businesses as both debtors in possession in bankruptcy and non-debtors.
Enron, the Commission's Division of Investment Management ("IM") and
the Commission's Division of Enforcement ("Enforcement") have held discussions
regarding the registration of Enron as a public utility holding company under
Section 5 of the Act, the chapter 11 plan for Enron and its affiliated debtor
entities, the solicitation of votes accepting or rejecting the plan, and various
transactions in furtherance of the chapter 11 cases that may require Commission
authorization under the Act were Enron a registrant under the Act./2 In
addition, a format for a comprehensive settlement of the exemption application
filed by Enron and other parties in SEC File No. 70-11373 has been discussed.
This application is the result of such discussions and is predicated on Enron's
registration under the Act in the near future, once the authorizations discussed
herein are in place.
As described infra in section C.3, Enron has entered into an agreement
to sell its only public utility subsidiary company, Portland General Electric
Company ("Portland General"). The chapter 11 plan also provides that Portland
General would be sold or, in the event such transaction cannot be consummated,
distributed to creditors and, in certain circumstances, equity interest
holders/3 as soon as requisite consents can be obtained and, as a possible
intermediate step, the common stock of Portland General may be contributed to a
trust ("PGE Trust"),/4 that
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1 Enron was formerly an exempt holding company under the Act by virtue of two
applications filed under Sections 3(a)(1), 3(a)(3) and 3(a)(5) of the Act. By
order, dated December 29, 2003, Holding Co. Act Release No. 27782, the
Commission denied the applications filed under Sections 3(a)(1), 3(a)(3) and
3(a)(5). Enron subsequently filed an application for exemption under Section
3(a)(4) of the Act on behalf of itself and two other entities. SEC File No.
70-10190. The Section 3(a)(4) application, as it related to Enron but not the
other two applicants, was set for hearing by Commission order, dated January 14,
2004, Holding Co. Act Release No. 27793.
2 A representative of the Creditors' Committee (defined below) attended some of
the discussions as an observer.
3 Applicants submit that, in accordance with existing projections, existing
Enron common stock and preferred stock are highly unlikely to receive any
distributions pursuant to the Plan. However, the Plan provides Enron
stockholders with a contingent right to receive a recovery in the event that the
total amount of Enron's assets, including recoveries in association with
litigation and the subordination, waiver or disallowance of Claims in connection
therewith, exceeds the total amount of Allowed Claims against Enron. No
distributions will be made in accordance with the Plan to holders of equity
interests unless and until all unsecured claims are fully satisfied.
4 There may be an adjustment in the number of Portland common shares prior to
contribution to the PGE Trust and in all events prior to distribution to
creditors. If the Portland General common stock is distributed to creditors
rather than sold as described herein, it is intended that the current Portland
General shares of common stock will be canceled and 80 million shares of new
Portland General common stock will be authorized and approximately 62.5 million
shares issued pursuant to the Plan, in each case, representing 100% of the
common equity of Portland General.
3
may be formed by December 31, 2004. Upon (i) the sale of Portland General, (ii)
the distribution of the shares of Portland General to creditors, or (iii) the
contribution of the Portland General common stock to the PGE Trust, it is
anticipated that Enron would deregister as a holding company under the Act.
Accordingly, this application seeks authorization for the transactions proposed
herein through the earlier of the deregistration of Enron and July 31, 2005.
The Applicants respectfully request this relief on an expedited basis.
As explained herein, the Applicants are in the midst of selling, reorganizing
and liquidating many subsidiaries and resolving contracts and claims. Without
adequate authorization under the Act, Applicants would be required to stop many
transactions that are currently being structured, negotiated or in progress,
many of which have already received authorization from the Bankruptcy Court
(defined below), and to postpone entering into other transactions until
appropriate orders from the Commission can be issued. Many of these transactions
represent significant value to the estates and creditors of Enron and certain of
its subsidiaries and affiliates and, in some cases, purchasers may withdraw from
a transaction, interest rates on negotiated financings may change, tax benefits
may be lost, or other consequences may flow from a delay. Enron also would be
prevented, in many respects, from operating in the ordinary course of business,
for example, borrowing from subsidiaries (other than Portland General), pursuant
to Bankruptcy Court order to pay its expenses. To prevent these adverse effects
to Applicants' creditors, Applicants respectfully request that the Commission
act on this application on an expedited basis.
B. Enron and its Subsidiaries
Enron is a public utility holding company within the meaning of the
Act by reason of its ownership of all of the outstanding voting securities of
Portland General, an Oregon electric public utility company.
From 1985 through mid-2001, Enron grew from a domestic natural gas
pipeline company into a large global natural gas and power company.
Headquartered in Houston, Texas, Enron and its subsidiaries historically
provided products and services related to natural gas, electricity, and
communications to wholesale and retail customers. As of December 2001, the Enron
companies employed approximately 32,000 individuals worldwide. The Enron
companies were principally engaged in (a) the marketing of natural gas,
electricity and other commodities, and related risk management and finance
services worldwide, (b) the delivery and management of energy commodities and
capabilities to end-use retail customers in the industrial and commercial
business sectors, (c) the generation, transmission, and distribution of
electricity to markets in the northwestern United States, (d) the transportation
of natural gas through pipelines to markets throughout the United States, and
(e) the development, construction, and operation of power plants, pipelines, and
other energy-related assets worldwide.
4
1. The Bankruptcy Cases and the Chapter 11 Plan
In the last quarter of 2001, the Enron companies lost access to the
capital markets, both debt and equity, and had insufficient liquidity and
financial resources to satisfy their current financial obligations. On December
2, 2001, Enron and certain of its subsidiaries each filed a voluntary petition
for relief under chapter 11 of title 11 of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Southern
District of New York ("Bankruptcy Court"). As of today, one hundred eighty (180)
Enron-related entities have filed voluntary petitions. Pursuant to sections 1107
and 1108 of the Bankruptcy Code, Enron and its subsidiaries that have filed
voluntary petitions (the "Debtors") continue to operate their businesses and
manage their properties as debtors in possession. Portland General, Enron's sole
public utility subsidiary company, has not filed a voluntary petition under the
Bankruptcy Code and is not in bankruptcy. Likewise, many other Enron companies
that are operating companies have not filed bankruptcy petitions and continue to
operate their businesses./5
The Debtors have been engaged, since the commencement of the chapter
11 cases, in the rehabilitation and disposition of their assets to satisfy the
claims of creditors. The Debtors have been consolidating, selling businesses and
assets, dissolving entities and simplifying their complex corporate structure.
The Debtors also have been involved in the settlement of numerous contracts
related to wholesale and retail trading of various commodities./6
The Debtors are holding cash from prior sales pending distribution
under a chapter 11 plan and are positioning other assets for sale or other
disposition./7 In this process, hundreds of
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5 On November 29, 2001, and on various dates thereafter, certain foreign
affiliates of Enron in England went into administration. Shortly thereafter,
various other foreign affiliates also commenced (either voluntarily or
involuntarily) insolvency proceedings in Australia, Singapore, and Japan.
Additional filings have continued world-wide and insolvency proceedings for
foreign affiliates are continuing for various companies registered in Argentina,
Bahamas, Bermuda, Canada, the Cayman Islands, France, Germany, Hong Kong, India,
Italy, Mauritius, the Netherlands, Peru, Spain, Sweden, and Switzerland. Once a
foreign affiliate is placed into a foreign insolvency proceeding, control of the
foreign affiliate along with the management and distribution of its assets will
generally be transferred to an insolvency practitioner, such as an
administrator, receiver, or liquidator. The foreign bankruptcies are not
administered jointly with the proceeding in the Bankruptcy Court. Thus,
commencement of most foreign proceedings results in a loss of ultimate control
by Enron and its subsidiaries over the assets of the foreign affiliate. Where
Enron no longer has control over such companies for the reasons described above,
the companies are no longer direct or indirect Enron subsidiaries and are not
subject to the Act. However, even if there are some companies over which Enron
retains control, the Commissions' jurisdiction under section 11(f) of the Act,
if any, extends only to those bankruptcy cases brought in United States courts.
None of the foreign proceedings referenced herein relate to Portland General.
6 After the commencement of the chapter 11 cases, both Debtor and non-Debtor
associates had a significant number of non-terminated and terminated positions
arising out of physical and financial contracts relating to numerous
commodities, including but not limited to power, natural gas, interest rates and
currencies, crude oil, liquid fuels, coal, pulp and paper, freight, steel,
metals, lumber and weather. These entities evaluated these contracts and have
undertaken efforts to perform, sell or settle these positions. The settlement of
these contracts is approved pursuant to pre-established protocols approved by
the Bankruptcy Court.
7 The Debtors, non-Debtor associates and other related companies have completed
a number of significant asset sales during the pendancy of the chapter 11 cases
resulting in gross consideration to the Debtors' bankruptcy estates, non-Debtor
associates, and certain other related companies aggregating approximately $3.6
billion. In many instances, proceeds from these sales are segregated, or in
escrow accounts, and the distribution of such proceeds will require either
consent of the Creditors' Committee or an order of the Bankruptcy Court.
5
corporations have been or will be liquidated./8 Eventually, substantially all of
the Debtors, including Enron, will be liquidated.
The Debtors have worked with the Official Committee of Unsecured
creditors appointed in the Debtors' chapter 11 cases (the "Creditors'
Committee"), the examiner appointed by the Bankruptcy Court with respect to the
chapter 11 case of Enron North America Corp. ("ENA") and individual creditor
groups to formulate a chapter 11 plan. On July 11, 2003, the Debtors filed a
joint chapter 11 plan and a related disclosure statement which documents were
subsequently amended several times. On January 12, 2004, the Debtors filed a
fifth amended plan (the "Plan") and a related amended disclosure statement with
the Bankruptcy Court./9 A hearing to consider the adequacy of the information
contained in the disclosure statement was held commencing on January 6, 2004. On
January 9, 2004, the Bankruptcy Court issued two orders approving the disclosure
statement for the Plan, establishing voting procedures, and ordering the
solicitation of votes approving or rejecting the Plan./10
The Plan provides for the appointment of a Reorganized Debtor Plan
Administrator ("Administrator") on the Effective Date for the purpose of
carrying out the provisions of the Plan. Pursuant to Section 1.226 of the Plan,
the Administrator would be Stephen Forbes Cooper, LLC, an entity headed by
Stephen Forbes Cooper, Enron's Acting President, Acting Chief Executive Officer,
and Chief Restructuring Officer. In accordance with Section 36.2 of the Plan,
the Administrator shall be responsible for implementing the distribution of the
assets in the Debtors' estates to the creditors, including, without limitation,
the divestiture of Portland General common stock or the sale of that stock
followed by the distribution of the proceeds to the creditors and, possibly,
equity interest holders. In addition, pursuant to the Plan, as of the Effective
Date, the Reorganized Debtors will assist the Administrator in performing the
following activities: (a) holding the Operating Entities, including Portland
General, for the benefit of creditors and providing certain transition services
to such entities, (b) liquidating the Remaining Assets, (c) making distributions
to creditors pursuant to the terms of the Plan, (d) prosecuting Claim objections
and litigation, (e) winding up the Debtors' business affairs, and (f) otherwise
implementing and effectuating the terms and provisions of the Plan.
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8 On the initial petition date, the Enron group totaled approximately 2,400
legal entities. Approximately 600 entities have been sold, merged or dissolved
and approximately 1,800 legal entities remain. By the end of 2004, it is
anticipated that all legal entities will be reduced to those necessary for
Enron's operating businesses (CrossCountry, Prisma and Portland General) and the
liquidation of assets.
9 The Plan and related disclosure statement are available at www.enron.com and
are included as Exhibits I-1 and I-2 to this Application. Unless defined in the
text of this Application, all capitalized terms used herein follow the
definitions specified in the Plan.
10 Order on motion of Enron Corp. approving the disclosure statement, setting
record date for voting purposes, approving solicitation packages and
distribution procedures, approving forms of ballots and vote tabulation
procedures, and scheduling a hearing and establishing notice and objection
procedures in respect of confirmation of the plan, Docket No. 15303, In re Enron
Corp., et al., Chapter 11 Case No. 01-16034 (AJG), Jan. 9, 2004 (U.S. Bankruptcy
Court, S.D.N.Y.). Order, pursuant to sections 105(a), 502, 1125 and 1126 of the
Bankruptcy Code and rules 3003, 3017 and 3018 of the Federal Rules of Bankruptcy
Procedure establishing voting procedures in connection with the plan process and
temporary allowance of claims procedures related thereto, Docket No. 15296, In
re Enron Corp., et al., Chapter 11 Case No. 01-16034 (AJG), Jan. 9, 2004 (U.S.
Bankruptcy Court, S.D.N.Y.). These orders are attached hereto as Exhibits J-1
and J-2.
6
C. Portland General Electric Company
1. Introduction
Portland General, incorporated in 1930, is a single, integrated
electric utility engaged in the generation, purchase, transmission,
distribution, and retail sale of electricity in the State of Oregon. Portland
General also sells wholesale electric energy to utilities, brokers, and power
marketers located throughout the western United States. Portland General's
service area is located entirely within Oregon and covers 3,150 square miles. It
includes 51 incorporated cities, of which Portland and Salem are the largest.
Portland General estimates that, at the end of 2002, its service area population
was approximately 1.5 million, comprising about 44% of the state's population.
As of December 31, 2002, Portland General served approximately 743,000 retail
customers. Portland General has approximately 26,085 miles of electric
transmission and distribution lines and owns 1,945 MW of generating capacity.
Portland General also has long-term power purchase contracts for 652 MW from
four hydroelectric projects on the mid-Columbia River and power purchase
contracts of one to twenty-six years for another 828 MW from BPA, other Pacific
Northwest utilities, and certain Native American tribes. As of December 31,
2002, Portland General's total firm resource capacity, including short-term
purchase agreements, was approximately 4,434 MW (net of short-term sales
agreements of 3,927 MW). The average annual demand is approximately 2,350 MW
with peak demand of approximately 3,800 MW.
On July 2, 1997, Portland General Corporation, the former parent of
Portland General, merged with Enron, with Enron continuing in existence as the
surviving corporation, and Portland General operating as a wholly owned
subsidiary of Enron. Portland General is not a Debtor in the chapter 11 cases.
As of December 31, 2002, Portland General had 2,757 employees. Portland General
is a reporting company under the Securities Exchange Act of 1934 and it files
annual, quarterly and periodic reports with the Commission. Portland General is
regulated by the Oregon Public Utility Commission ("OPUC") with regard to its
rates, terms of service, financings, affiliate transactions and other aspects of
its business. The company is also regulated by the Federal Energy Regulatory
Commission ("FERC") with respect to its activities in the interstate wholesale
power markets.
As of and for the nine months ended September 30, 2003, Portland
General and its subsidiaries on a consolidated basis had operating revenues of
$1,375 million, net income of $30 million, retained earnings of $517 million,
and assets of $3,185 million.
2. Portland General is Extensively Insulated from Enron
Portland General maintains a separate business from Enron by, inter
alia, in all material respects, maintaining books and records separate from
Enron; maintaining its bank accounts separate from Enron; not commingling its
assets with those of Enron; managing cash separately; holding all of its assets
in its own name; conducting its own business in its own name; preparing and
maintaining separate financial statements; showing its assets and liabilities
separate and apart from those of Enron; paying its own liabilities and expenses
only out of its own funds; observing all corporate and other organizational
formalities; maintaining an arm's length relationship with Enron and entering
into transactions with Enron only as permitted by state and
7
federal authorities; paying the salaries of its own employees from its own
funds; not guaranteeing or becoming obligated for the debts of Enron; not
holding out its credit as available to satisfy the obligations of Enron; using
separate stationery, invoices and checks bearing its own name; not pledging its
assets for the benefit of Enron; maintaining its own pension plan; holding
itself out solely as a separate entity; correcting any known misunderstanding
regarding its separate identity; not identifying itself as a division of Enron;
and maintaining adequate capital in light of its contemplated business
operations. Portland General, Enron and other affiliates have, however, filed
consolidated tax returns and utilized tax sharing arrangements that are commonly
utilized by affiliated corporations filing consolidated tax returns.
In an effort to preserve Portland General's credit rating,/11 a
bankruptcy remote structure was created that requires the affirmative vote of an
independent shareholder who holds a share of limited voting junior preferred
stock of Portland General before Portland General can be placed into bankruptcy
unilaterally by Enron, except in certain carefully prescribed circumstances in
which the reason for the bankruptcy is to implement a transaction pursuant to
which all of Portland General's debt will be paid or assumed without impairment.
In addition, a number of restrictions were put in place with the
approval of the OPUC at the time of Enron's merger with Portland General
Corporation. Among other things, Portland General may not make any equity
distribution to Enron that would cause Portland General's equity capital to fall
below forty-eight percent (48%) of Portland General's total capital without OPUC
approval. This obligation is set forth as condition 6 of the stipulation
attached as Appendix A and made part of OPUC Order No. 97-196 (the "Enron Merger
Order") issued in docket UM 814, the Matter of the Application of Enron Corp.
for an Order Authorizing the Exercise of Influence over Portland General
Electric Company. The Enron Merger Order is attached hereto as Exhibit K.
Portland General has not paid cash dividends to Enron since the second quarter
of 2001. To help the OPUC monitor Portland General's capital structure,
condition 9 to the Enron Merger Order requires Enron to disclose to the OPUC on
a timely basis (as defined in the condition) its intent to transfer more than
five percent of Portland General's retained earnings over a six-month period (60
days before beginning the transfer), its intent to declare a special cash
dividend from Portland General (30 days before the declaration), and its most
recent quarterly common stock cash dividend payment (30 days after the
declaration).
In addition, Portland General may issue stocks, bonds, notes, or other
evidences of indebtedness only with the prior approval of the OPUC and can use
the proceeds only for the purpose specified in the OPUC order authorizing the
issue. Issuance of short-term indebtedness (less than one year) does not require
OPUC approval, but does require the approval of the Federal Energy Regulatory
Commission. Under ORS 757.480, Portland General must obtain prior OPUC approval
to sell, lease, assign, or otherwise dispose of property worth over $100,000
that is "necessary or useful in the performance of its duties;" mortgage or
otherwise encumber any necessary or useful property; or "merge or consolidate
any of its lines, plants, system or other property." Prior OPUC approval is also
necessary to dispose of or encumber "any franchise, permit or right to maintain
and operate (...) or perform any service as" a public utility. ORS 757.480(1).
Absent that required approval, the transaction is void. ORS 757.480(3).
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11 Portland General's ratings are discussed in Item 1.E.1.f below.
8
Portland General's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2003, explains the balances on Portland General's
books that are attributable to related party transactions. The largest of the
related party items is an approximately $86 million (including accrued interest)
merger receivable from Enron for which a reserve has been established. Under
terms of the 1997 merger that resulted in Enron's acquisition of Portland
General, Enron agreed to provide $105 million of benefits to Portland General's
customers over an eight-year period through reductions in Portland General's
prices to its customers. In 2000, the remaining reductions due to Portland
General's customers was offset against amounts Portland General was to recover
from customers for its investment in the Trojan nuclear plant. Enron remained
obligated to Portland General for the approximate $80 million remaining balance
and continued to make monthly payments, as provided under the merger agreement.
Enron suspended its monthly payments to Portland General in September
2001, pursuant to its stock purchase agreement with NW Natural Gas Company,
under which NW Natural was to have assumed Enron's merger payment obligation
upon its purchase of Portland General. The stock purchase agreement was
terminated in May 2002. At September 30, 2003, Enron owed Portland General
approximately $86 million, including accrued interest./12 The realization of the
merger receivable from Enron is uncertain at this time due to Enron's
bankruptcy. Based on this uncertainty, Portland General has established a
reserve for the full amount of this receivable, of which $74 million was
recorded in December 2001.
On October 15, 2002, Portland General submitted proofs of claim to the
Bankruptcy Court for amounts owed Portland General by Enron and other Debtors,
including approximately $73 million (including accrued interest) for the merger
receivable balance as of December 2, 2001, the date of Enron's bankruptcy
filing. As noted above, although Portland General's eventual recovery on the
merger receivable is uncertain, Portland General's customers have already
received the benefit of the price reductions agreed to in 1997 through the
offset. In addition, Portland General has fully reserved for the merger
receivable on its books. Therefore, in the event that Portland General is not
able to collect any amounts in connection with its bankruptcy claim, there will
be no additional negative charge on its books. If, on the other hand, Portland
General does collect any amounts on this claim, such amounts will be reflected
as earnings on its books.
In addition to the above, Portland General may have potential exposure
to certain liabilities as a result of Enron's bankruptcy that arise from being
part of Enron's control group. These potential liabilities relate to pension
plans, retiree health benefits and income taxes and are described in detail in
Portland General's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2003, at note 7.
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12 In addition, at September 30, 2003, Portland General had outstanding accounts
receivable of $8.6 million from other Enron subsidiary companies that are part
of the bankruptcy case, including $5.4 million due from Portland General
Holdings, Inc. and $3.2 million due from Enron, Enron Broadband Services, Enron
North America, Enron Engineering & Construction and Enron Power Marketing Inc.
Based on Portland General's assessment of the realizability of these balances, a
reserve of $4 million has been established. In addition, certain subsidiaries of
Portland General have outstanding accounts receivable of $0.2 million from Enron
and Enron North America.
9
3. Sale of Portland General
Enron recently announced an agreement to sell the common stock of
Portland General to Oregon Electric Utility Company, LLC ("Oregon Electric"), a
newly-formed entity financially backed by investment funds managed by the Texas
Pacific Group, a private equity investment firm./13 The transaction is valued at
approximately $2.35 billion, including the assumption of debt. The sale is
subject to the receipt of Bankruptcy Court, OPUC and certain other regulatory
authorizations and closing is currently anticipated to occur in the second half
of 2004. The transaction is described in detail in Exhibits B-1 and B-2. On
December 5, 2003, the Bankruptcy Court issued a bidding procedures order
specifying January 28, 2004 as the last date on which competing prospective
buyers may submit bids to acquire Portland General./14 Under the purchase
agreement, Enron is permitted to accept a bid that represents a "higher or
better" offer for Portland General. No qualifying bid was received prior to the
January 28, 2004 deadline.
If Portland General has not been sold, is no longer the subject of the
purchase agreement described above and is not the subject of another purchase
agreement, then, Enron will cause Portland General to distribute Portland
General's shares to creditors pursuant to the Plan. In preparation for the
distribution of Portland General under the Plan, upon receipt of all appropriate
regulatory approvals, Enron may transfer its ownership interest in Portland
General to PGE Trust, a to-be-formed entity. If formed, PGE Trust would hold
Enron's interest in Portland General as a liquidating vehicle, for the purpose
of distributing, directly or indirectly, the shares of Portland General (or the
proceeds of a sale of Portland General) to the Debtor's creditors as required by
the Plan. It is possible that PGE Trust also would hold Enron's interest in
Portland General for the purposes of consummating the sale of Portland General
to Oregon Electric./15
D. Prisma, CrossCountry and the Debtors' Other Assets
In addition to the divestiture of Portland General, other key aspects
of the Plan include the formation of holding companies, Prisma Energy
International Inc. ("Prisma") and CrossCountry Energy Corp. ("CrossCountry")./16
Prisma is a Cayman Islands entity formed initially as a holding company pending
the transfer of certain international energy infrastructure businesses that are
indirectly owned by Enron and certain of its affiliates. CrossCountry is a
Delaware corporation that would hold Enron's pipeline businesses, which provide
natural gas transportation services through an extensive North American pipeline
infrastructure. As part of the Plan, creditors would receive shares of Prisma
and CrossCountry, interests in a trust or other entity formed to distribute
these assets, or cash proceeds of the sale of Prisma or CrossCountry. The Plan
also makes provision for the distribution of other assets of the Debtors'
estate, including in excess of $6 billion in cash, the proceeds of the
liquidation or divestiture of businesses that do not fit into Prisma and
CrossCountry, and the value of certain claims that Enron is pursuing
--------------------
13 Enron Corp. Press Release dated November 18, 2003.
14 Docket No. 14665, In re Enron Corp., et al., Chapter 11 Case No. 01-16034
(AJG), Dec. 5, 2003 (U.S. Bankruptcy Court, S.D.N.Y.).
15 See Article XXIV of the Plan.
16 Of the approximately 1,800 entities in the Enron group currently,
approximately 82 entities would become part of Prisma and 15 would be
contributed to CrossCountry. The remaining entities would be sold or liquidated
in accordance with the Plan.
10
against various professional service firms and financial institutions such as
commercial and investment banks. Additional detail with respect to Prisma and
CrossCountry is provided below:
1. Prisma
Prisma, a Cayman Islands limited liability company, was organized on
June 24, 2003 for the purpose of acquiring the Prisma Assets, which include
equity interests in the identified businesses, intercompany loans to the
businesses held by affiliates of Enron, and contractual rights held by
affiliates of Enron. Enron and its affiliates will contribute the Prisma Assets
to Prisma in exchange for shares of Prisma Common Stock commensurate with the
value of the Prisma Assets contributed.
The contribution of the Prisma Assets is expected to be effected
pursuant to a Prisma Contribution and Separation Agreement to be entered into
among Prisma and Enron and several of its affiliates. It is anticipated that the
Prisma Contribution and Separation Agreement, which is currently being
negotiated, will be submitted for Bankruptcy Court approval either as part of
the Plan Supplement or by a separate motion.
Prisma and Enron and its affiliates also expect to enter into certain
ancillary agreements, which may include a new Transition Services Agreement, a
tax allocation agreement ("Prisma Tax Allocation Agreement") and a Cross License
Agreement. The employees of Enron and its affiliates who have been supervising
and managing the Prisma Assets since December 2001, became employees of a
subsidiary of Prisma effective on or about July 31, 2003. In connection
therewith, as approved by the Bankruptcy Court,/17 Enron and its affiliates
entered into four separate Transition Services Agreements pursuant to which such
employees will continue to supervise and manage the Prisma Assets and other
international assets and interests owned or operated by Enron and its
affiliates. The ancillary agreements, together with the Prisma Contribution and
Separation Agreement, will govern the relationship between Prisma and Enron and
its affiliates subsequent to the contribution of the Prisma Assets, provide for
the performance of certain interim services, and define other rights and
obligations until the distribution of shares of capital stock of Prisma pursuant
to the Plan or the sale of the stock to a third party. In addition, the Prisma
Contribution and Separation Agreement or the ancillary agreements are expected
to set forth certain shareholder protection provisions with respect to Prisma
and may contain indemnification obligations of the Prisma Enron Parties.
No operating businesses or assets have been transferred to Prisma at
this time; however, subject to obtaining requisite consents, the Debtors intend
to transfer the businesses described above to Prisma either in connection with
the Plan or at such earlier date as may be determined by Enron and approved by
the Bankruptcy Court.
Prisma will be engaged in the generation and distribution of
electricity, the transportation and distribution of natural gas and liquefied
petroleum gas, and the processing of natural gas liquids. If all businesses are
transferred to Prisma as contemplated, Prisma will own interests in businesses
whose assets will:
--------------------
17 Docket No. 11915, In re Enron Corp., et al., Chapter 11 Case No. 01-16034
(AJG), July 24, 2003 (U.S. Bankruptcy Court, S.D.N.Y.); Docket No. 13710, In re
Enron Corp., et al., Chapter 11 Case No. 01-16034 (AJG), Oct. 24, 2003 (U.S.
Bankruptcy Court, S.D.N.Y.).
11
o Include over 9,600 miles of natural gas transmission and
distribution pipelines;
o Include over 56,000 miles of electric transmission and
distribution lines;
o Include over 2,100 MW of electric generating capacity;
o Serve 6.5 million LPG, gas, and electricity customers;
o Be located in 14 countries; and
o Employ over 7,900 people.
It is contemplated that the operating businesses contributed to Prisma
would be engaged in the businesses described above and businesses related or
incidental thereto. Applicants do not expect that any significant non-energy
related businesses would be made a part of Prisma.
Prisma will be an energy infrastructure company providing energy
generation, transportation, processing, and distribution services. By
concentrating on its core competencies of owning and operating energy
infrastructure assets in diverse international locations, Prisma intends to
focus on being a low-cost, efficient operator in the markets it serves. Prisma's
anticipated objective is to generate stable cash flow, earnings per share, and
dividends, and to grow each of these through growth projected within the
existing portfolio of businesses. The corporate affairs of Prisma will be
governed by its memorandum and articles of association, amended and restated
versions of which will accompany the Prisma Contribution and Separation
Agreement, and by the laws of the Cayman Islands.
In addition to Bankruptcy Court approval, the transfer of the
businesses described above to Prisma will require the consent of other parties,
including, but not limited to, governmental authorities in various
jurisdictions. If any such consents are not obtained, then at the discretion of
Enron, with the consent of the Creditors' Committee, as contemplated in the
Plan, one or more of these businesses may not be transferred to Prisma, but
instead will remain directly or indirectly with Enron.
Applicants intend that Prisma will certify as a foreign utility
company ("FUCO") under Section 33 under the Act prior to the transfer of the
businesses described above to Prisma. The transfer of such businesses to Prisma
in exchange for interests in Prisma would generally be exempt under Section
33(c)(1) of the Act. Nevertheless, certain indemnification agreements between
Enron group/18 companies in connection with the contribution of the Prisma
Assets would constitute the extension of credit among associate companies and
would require Commission authorization under Section 12(b) of the Act and Rule
45(a) thereunder. In addition, the Prisma Tax Allocation Agreement to be entered
into among Prisma, Enron and certain Enron affiliates, is expected to require
Prisma to be obligated to make dividend distributions to its shareholders in
certain minimum amounts (to the extent of available cash) for
--------------------
18 "Enron group" includes all of Enron's subsidiaries, whether or not they are
Debtors.
12
so long as Enron or any affiliate or the Disputed Claims reserve is required to
include amounts in income for federal income tax purposes in respect of the
ownership of Prisma shares. Applicants seek authorization to enter into
indemnification agreements and the Tax Allocation Agreement in connection with
the formation of Prisma as authorized by the Bankruptcy Court and as described
above. In addition, Prisma will seek to avail itself of any other authorizations
granted to Enron's subsidiaries in connection with this application such as
authorizations relating to dividends and reorganizations.
2. CrossCountry
CrossCountry was incorporated in the State of Delaware on May 22,
2003. On June 24, 2003, CrossCountry and the CrossCountry Enron Parties entered
into the original CrossCountry Contribution and Separation Agreement providing
for the contribution of Enron's direct and indirect interests in its interstate
pipelines and other related assets to CrossCountry. On September 25, 2003, the
Bankruptcy Court issued an order approving the transfer of the pipeline
interests and the related assets from the CrossCountry Enron Parties to
CrossCountry and other related transactions, pursuant to the original
CrossCountry Contribution and Separation Agreement. That order contemplates that
the parties may make certain modifications to the original Contribution and
Separation Agreement./19 The parties are negotiating an Amended and Restated
Contribution and Separation Agreement that incorporates certain changes to the
original Contribution and Separation Agreement including the substitution of
CrossCountry Energy LLC ("CrossCountry LLC") in place of CrossCountry as the
holding company owning the pipeline interests.
Pursuant to the Amended and Restated Contribution and Separation
Agreement, Enron and certain of its affiliates would contribute their ownership
interests in the certain gas transmission pipeline businesses and certain
non-utility service companies to CrossCountry LLC in exchange for equity
interests in CrossCountry LLC. The closing of the transactions contemplated by
the Amended and Restated Contribution and Separation Agreement is expected to
occur as soon as possible. It is anticipated that, following confirmation of the
Plan and prior to the CrossCountry Distribution Date, the equity interests in
CrossCountry LLC will be exchanged for equity interests in CrossCountry
Distributing Company in the CrossCountry Transaction. As a result of the
CrossCountry Transaction, CrossCountry Distributing Company will obtain direct
or indirect ownership in the Pipeline Businesses and certain services companies
described below. CrossCountry LLC's principal assets will, upon closing of the
formation transactions, consist of the following:
o A 100% indirect ownership interest in Transwestern Holdings
Company, Inc. ("Transwestern"), which, through its
subsidiary Transwestern Pipeline Company, owns an
approximately 2,600-mile interstate natural gas pipeline
system that transports natural gas from western Texas,
Oklahoma, eastern New Mexico, the San Juan basin in
northwestern New Mexico and southern
--------------------
19 Docket No. 13381, In re Enron Corp., et al., Chapter 11 Case No. 01-16034
(AJG), Oct. 8, 2003 (U.S. Bankruptcy Court, S.D.N.Y.); Docket No. 14560, In re
Enron Corp., et al., Chapter 11 Case No. 01-16034 (AJG), Dec. 1, 2003 (U.S.
Bankruptcy Court, S.D.N.Y.).
13
Colorado to California, Arizona, and Texas markets.
Transwestern's net income for the year ended December 31,
2002 was $20.7 million.
o A 50% ownership interest in Citrus Corp. ("Citrus"), a
holding company that owns, among other businesses, Florida
Gas Transmission Company ("FGT"), a company with an
approximately 5,000-mile natural gas pipeline system that
extends from South Texas to South Florida. An affiliate of
CrossCountry operates Citrus and certain of its
subsidiaries. Citrus's net income for the year ended
December 31, 2002 was $96.6 million, 50% of which, or $48.3
million, comprised Enron's equity earnings. CrossCountry LLC
is expected to hold its interest in Citrus through its
wholly owned subsidiary, CrossCountry Citrus Corp.
o A 100% interest in Northern Plains Natural Gas Company
("Northern Plains"), which directly or through its
subsidiaries holds 1.65% out of an aggregate 2%
general-partner interest and a 1.06% limited-partner
interest in Northern Border Partners, L.P. ("Northern
Border") a publicly traded limited partnership (NYSE: NBP),
that is a leading transporter of natural gas imported from
Canada to the Midwestern United States. Pursuant to
operating agreements, Northern Plains operates Northern
Border's interstate pipeline systems, including Northern
Border Pipeline, Midwestern, and Viking. Northern Border
also has (i) extensive gas gathering operations in the
Powder River Basin in Wyoming, (ii) natural gas gathering,
processing and fractionation operations in the Williston
Basin in Montana and North Dakota, and the western Canadian
sedimentary basin in Alberta, Canada, and (iii) ownership of
the only coal slurry pipeline in operation in the United
States. Northern Border's net income for the year ended
December 31, 2002 was $113.7 million, of which $9.1 million
comprised Enron's equity earnings.
These companies have a history of expanding their pipeline systems to
meet growth in market demand and to increase customers' access to additional
natural gas supplies. These expansions not only provide the individual
interstate pipeline businesses with additional net income and cash flow, but
also are important factors in maintaining and enhancing their market positions.
Historically, the interstate pipeline businesses have undertaken expansions when
they are backed by long-term firm contract commitments. In addition, the
pipelines have historically made acquisitions to meet market growth and gain
access to gas supplies.
It is expected that the contribution of the interests in the gas
pipeline businesses to CrossCountry LLC under the Amended and Restated
Contribution and Separation Agreement, in exchange for equity interests in
CrossCountry LLC, would be exempt capital contributions under Rule 45(b)(4)
under the Act. Agreements among companies in the Enron group to indemnify other
Enron group companies in connection with the contribution of these businesses
and the financing of the CrossCountry entities would, however, constitute
extensions of credit among associate companies under Section 12(b) of the Act
and Rule 45(a) thereunder. Intercompany indemnifications are necessary to
implement the goal of having all of the pipeline related assets and liabilities
at CrossCountry and all of the non-pipeline related assets and liabilities in
other entities. Without indemnifications it would not be feasible to carve the
assets that will become CrossCountry out of the Enron group because they would
bring with them a "tail" of potential
14
liabilities associated with prior dealings in the Enron group. Indemnifications
are used to focus the liabilities related to certain events or transactions on
the companies most responsible for such events or transactions and, accordingly,
they are in the interest of investors, consumers and the public in that they
further the rationalization of Enron's complex intercompany relationships and
promote the resolution of the chapter 11 process. In most cases,
indemnifications would be part and parcel of larger transactions that would be
approved by the Bankruptcy Court unless they are considered to be in the
ordinary course of business./20
In addition, the Amended and Restated Contribution and Separation
Agreement contemplates that a tax allocation agreement ("CrossCountry Tax
Allocation Agreement") would be entered into among CrossCountry and its
subsidiaries and Enron. The CrossCountry Tax Allocation Agreement would comply
with the requirements of Rule 45(c) under the Act in all material respects,
except that it would permit Enron to receive payment from the subsidiaries
filing jointly with Enron for the value of any net operating losses of other tax
attributes that resulted in a reduction in the consolidated tax, ratably with
any other Enron subsidiary also contributing such tax benefits to the
consolidated tax group. Applicants seek authorization to enter into the
CrossCountry transaction consistent with the authorization granted by the
Bankruptcy Court and with the terms and conditions of the Amended and Restated
Contribution and Separation Agreement, including, but not limited to, the
indemnification agreements, the Tax Allocation Agreement, and related financing
transactions in connection with the formation of CrossCountry as authorized by
the Bankruptcy Court and as described above.
E. Other Transactions For Which Relief Is Requested
1. Financing Transactions
Upon Enron's registration under the Act, unless the transaction has
been approved by the Commission or is exempt under the Act, Enron and its
subsidiaries will be precluded from (i) issuing or selling any security, or (ii)
exercising any privilege or right to alter the priorities, preferences, voting
power or other rights of any outstanding security./21 Because "security" is very
broadly defined,/22 virtually any issuance of any equity, debt or agreement to
pay or guarantee indebtedness or other obligations could be characterized as the
issuance and sale of a security for which Commission approval would be required
unless a specific exemption is available./23
--------------------
20 Portland General does not seek authorization to issue indemnifications on
behalf of any companies other than its direct or indirect subsidiaries.
21 See Section 6 (a).
22 See Section 2(a)(16).
23 For example, limited amounts of short-term debt are exempted by statute.
Section 6(b) provides that subsection (a) does not apply to the issue, renewal
or guaranty by a registered holding company or any of its subsidiaries of any
note or draft that (1) is not part of a public offering; (2) matures or is
renewed for not more than nine months after the date of such issue, renewal or
guaranty thereof; and (3) aggregates, together with any other notes outstanding
of nine months maturity or less, not more than 5 percent of the principal amount
and par value of the other securities of such company then outstanding. If the
common stock has no or penny par value, it will be counted at its "fair value"
as of the date of the issue for purposes of Section 6(b).
15
Applicants describe below a number of financing transactions that
would require Commission authorization under the Act. The Applicants hereby
request authorization for these types of transactions.
a. The Debtor-in-Possession ("DIP") Financing Arrangements
On December 2, 2001, Enron entered into a DIP Credit Agreement with
several banks to provide a debtor in possession credit facility of $1.5 billion
and a letter of credit subfacility up to the amount of the aggregate available
commitment. On December 4, 2001, the Bankruptcy Court entered the Interim DIP
Order approving the DIP Credit Agreement on an interim basis and authorizing
borrowings and issuances of letters of credit in an amount up to $250 million.24
The Debtors subsequently determined that, with the exception of the letters of
credit, they did not foresee the need to borrow funds in the form or manner as
contemplated by the DIP Credit Agreement. Accordingly, the Debtors sought to
amend the DIP Credit Agreement and on July 2, 2002, the Bankruptcy Court entered
an order authorizing the Debtors to obtain post petition financing through
letters of credit only pursuant to the Amended DIP Credit Agreement./25
The Amended DIP Credit Agreement essentially permitted the Debtors to
obtain up to $250 million in letter-of-credit financing, including a sub-limit
of $50 million for the issuance of letters of credit, for the benefit of
non-Debtor associates, and to use such letters of credit in the operation of
their respective businesses. Pursuant to the terms of the Amended DIP Credit
Agreement, Enron deposited $25 million in a letter of credit cushion account
maintained at the offices of JP Morgan Chase Bank ("JPMCB"), and each Debtor for
whose benefit a letter of credit is to be issued must place cash collateral in
an amount equal to 110% of the face amount of such letter of credit in a
separate account maintained at the offices of JPMCB. The Amended DIP Credit
Agreement does not require the Debtors to incur any new fees beyond those
originally required under the DIP Credit Agreement. The Amended DIP Credit
Agreement was scheduled to terminate on June 3, 2003.
On May 8, 2003, the Bankruptcy Court entered an order approving the
extension of the Debtors' post petition financing pursuant to the Second Amended
DIP Credit Agreement. The extension decreases the aggregate amount available for
letters of credit to $150 million, increases the sub-limit for letters of credit
issued for the benefit of non-Debtor associates to $65 million, decreases the
amount deposited by Enron in the letter of credit cushion account to $15
million, and decreases JPMCB's and Citicorp's annual fees as Collateral Agent
and Paying Agent, respectively, to $200,000 each. The Second Amended DIP Credit
Agreement is scheduled to terminate on June 3, 2004. Enron paid an extension fee
to the DIP Lenders in an amount equal to 0.20% of the aggregate amount available
under the Second Amended DIP Credit Agreement. In addition, the Second Amended
DIP Credit Agreement provides that Enron would pay a letter of credit fee of 150
basis points on the issued amount of any letter of credit, a commitment fee on
the undrawn balance of the letter of credit facility of 50 basis points, a
fronting fee on the issued amount of any letter of credit of 25 basis points and
an applicable margin on unreimbursed letters of credit of 50 basis points.
--------------------
24 Docket No. 0063, In re Enron Corp., et al., Chapter 11 Case No. 01-16034
(AJG), Dec. 4, 2001 (U.S. Bankruptcy Court, S.D.N.Y.).
25 Docket No. 4888, In re Enron Corp., et al., Chapter 11 Case No. 01-16034
(AJG), July 2, 2002 (U.S. Bankruptcy Court, S.D.N.Y.).
16
Under the Second Amended DIP Credit Agreement, Enron's obligations are
guaranteed by its debtor subsidiaries that are parties to the credit agreement.
Each new debtor becomes an additional guarantor under the agreement when an
applicability order is entered by the Bankruptcy Court shortly after such entity
files a petition under chapter 11. As a non-Debtor, Portland General is not a
guarantor under this credit agreement.
An upstream extension of credit generally would be considered a
prohibited transaction under Section 12(a) of the Act./26 In addition, virtually
all the property of Enron and its debtor subsidiaries, including the stock of
Portland General, is pledged as collateral to secure the obligations of the
borrowers under the credit facility./27 Had such a pledge been entered into
after registration, it would have required the authorization of the Commission
under Section 12(d) of the Act./28
As of today, Enron has four letters of credit outstanding under the
Second Amended DIP Credit Agreement in the approximate aggregate amount of $24.5
million. Applicants seek Commission authorization to continue to obtain letters
of credit, or to extend the maturity of previously issued letters of credit, up
to an aggregate amount of $150 million under the Second Amended DIP Credit
Agreement as now in effect or as it may subsequently be amended or extended by
order of the Bankruptcy Court through June 30, 2005. Applicants also request
authorization for additional debtors to become guarantors under the agreement
when the Bankruptcy Court enters an applicability order with respect to such
debtor making the provisions of the Second Amended DIP Credit Agreement
applicable to such entity. This request is appropriate under the circumstances
because: (a) the agreement was entered into prior to Enron's registration under
the Act, (b) it has been approved by the Bankruptcy Court, and (c)
post-registration it would be used for a limited purpose that is not likely to
adversely affect any Enron subsidiaries. The full cash collateralization of each
letter of credit means that, if one is drawn upon it would be covered by cash
held by JPMCB. Thus, the DIP Credit Facility will not
--------------------
26 Section 12(a) provides, in part, that it is unlawful for a registered holding
company to "borrow, or to receive any extension of credit or indemnity, from any
public utility company in the same holding company system or from any subsidiary
company of such holding company, but it shall not be unlawful under this
subsection to renew, or extend the time of, any loan, credit, or indemnity
outstanding on the date of the enactment of this title."
27 To induce certain financial institutions ("DIP Lenders") to make loans and
issue letters of credit to Enron and certain of its subsidiaries after Enron had
entered bankruptcy, Enron entered into a Pledge Agreement with JPMCB, as
Collateral Agent, dated December 3, 2001 ("Pledge Agreement"). Under the Pledge
Agreement certain collateral was assigned and pledged by Enron to the Collateral
Agent for the benefit of the DIP Lenders. The collateral included a security
interest in the common stock of Portland General and all income, profits,
distributions, proceeds or payments related thereto. Under the Pledge Agreement
voting rights and numerous other rights affecting the power to control Portland
General may not be exercised by the Collateral Agent or its principals unless an
event of default has occurred and all governmental and regulatory approvals have
been obtained. The Pledge Agreement also provides that the transfer of the
Portland General shares to the Collateral Agent shall not constitute a transfer
of title or ownership to the shares. Upon an event of default, as defined in the
Pledge Agreement, and the receipt of all required regulatory approvals, the
Collateral Agent may sell the collateral at a public or private sale at a price
it deems satisfactory. There are currently no defaults under the Pledge
Agreement. Finally, the Pledge Agreement provides that the DIP Lenders will
release their lien on the Portland General shares if Portland General is sold.
The Bankruptcy Court authorized Enron to enter into this financing arrangement
by order dated July 2, 2002. Docket No. 4888, In re Enron Corp., et al., Chapter
11 Case No. 01-16034 (AJG), July 2, 2002 (U.S. Bankruptcy Court, S.D.N.Y.).
28 The Pledge Agreement for the Portland General shares requires that the
creditors obtain all necessary regulatory authorizations, including the
authorization of the Commission under the Act, prior to acquiring the Portland
General shares or exercising any substantive voting or control rights with
respect to Portland General.
17
adversely affect Portland General or Enron's other subsidiaries by subjecting
the collateral to foreclosure under the agreement or through a claim under the
subsidiary guarantees of the facility.
It is necessary for Enron to maintain the facility because Enron
currently has limited alternative sources of financing and letters of credit are
currently required by certain parties, e.g. insurance companies, that will not
accept cash collateral or other arrangements to secure Enron's performance
obligations under various contracts. The facility also permits Enron to post a
letter of credit to secure obligations of the company under trading contracts
with counterparties where to post cash collateral would subject the estate to
risks associated with the credit of that counterparty. The Second Amended DIP
Credit Agreement thereby helps to preserve the assets of the estate for its
creditors.
Although Applicants recognize that the pledge of the Portland General
common stock and the subsidiary guarantees of the credit agreement may not have
been authorized by the Commission had Enron been a registered holding company at
the time the facility was initially agreed, the Commission should authorize the
facility as it is now structured and as it may be amended from time to time with
the consent of the Bankruptcy Court for purposes of granting waivers, extending
maturity dates and similar reasons. The Second Amended DIP Credit Agreement
contains terms that are typical of debtor in possession financing arrangements.
Lenders to debtors in possession seek extensive collateral and guarantees to
secure their loans as a matter of course and it would be disruptive to the
business of the estate to attempt to renegotiate this facility with the lenders
at this time. An authorization of the facility is similar to the grandfathering
of previously issued debt under the Act at the time a company first becomes
registered under the Act. Notably, the pledge of the Portland General shares is
subject to the receipt of all required regulatory authorizations, including the
approval of this Commission, should the lenders seek to foreclose on that stock.
The full collateralization of the letters of credit under the facility indicates
that there is an exceedingly low probability, if any, that the guarantees or the
collateral provisions of the facility would ever be invoked. Accordingly, it is
reasonable for the Commission to view the facility as one that does not violate
the prohibition in Section 12(a) of the Act regarding the extension of credit
from a subsidiary to a registered holding company.
b. Pre-Petition Letters of Credit
In a limited number of instances, the Debtors may be obligated on
reimbursement agreements in connection with certain letters that are still
outstanding and which the issuing bank may choose to extend, without the consent
or involvement of a Debtor. This renewal is beyond the control of the Debtors
and the Debtors do not take any affirmative action in connection with such
renewal. Absent such a renewal, the beneficiary of the letter of credit would
have a right to draw on the letter of credit, to the detriment of both the
lender that issued the letter of credit and the Debtors who have a pre-petition
reimbursement obligation to such lenders. To the extent necessary, Applicants
seek Commission authorization for such involuntary extension of the maturity of
any such letter of credit.
18
c. Enron Cash Management
Enron managed its cash on a centralized basis with funds loaned to or
from Enron and to subsidiaries. Enron is permitted to continue to borrow from or
lend to certain subsidiaries under terms specified by the Bankruptcy Court.
Orders of the Bankruptcy Court dated December 3, 2001 and February 25, 2002,
permit, among other things, the Debtors to use their centralized cash management
system, subject to certain modifications including a grant of adequate
protection for intercompany transfers in the form of superpriority Junior
Reimbursement Claims and Junior Liens./29
The Amended Cash Management Order/30 provides:
Notwithstanding any other Order of the Court, and as adequate
protection for each Debtor for the continued use of the
Centralized Cash Management System, to the extent that any Debtor
transfers (or transferred) property (including cash) following
the Petition Date (the "Adequately Protected Debtor") to or for
the benefit of any other Debtor (the "Beneficiary Debtor"), with
an aggregate fair value in excess of the aggregate fair value of
property (including cash) or benefit received by the Adequately
Protected Debtor from the Beneficiary Debtor following the
Petition Date, then... (a) the Adequately Protected Debtor shall
have (x) an allowed claim against the Beneficiary Debtor for the
fair value of property (including cash) or benefit transferred
(net of any reasonable expenses for overhead or other services
reasonably allocated or reasonably charged to the Adequately
Protected Debtor), under Sections 364(c)(1) and 507(b), having
priority over any and all administrative expenses of the kind
specified in Sections 503(b) and 507(b) of the Bankruptcy Code,
which claim shall bear interest at the Prevailing Rate...for the
period accruing from and after the date such claim arises until
repayment thereof (collectively, the "Junior Reimbursement
Claim") and (y) a lien on all property of the Beneficiary
Debtor's estate under Section 364(c)(3) of the Bankruptcy Code
securing such Junior Reimbursement Claim ("Junior Lien"). . . .
Amended Cash Management Order, P. 5(a).
Such Junior Reimbursement Claims and Junior Liens are junior and
subject and subordinate only to the superpriority claims and liens granted to
the DIP Lenders and their agent in respect of the Debtors' DIP obligations, and
thus provide extensive protections to the Debtors
--------------------
29 Docket No. 0034, In re Enron Corp., et al., Chapter 11 Case No. 01-16034
(AJG), Dec. 3, 2001 (U.S. Bankruptcy Court, S.D.N.Y.); Docket No. 1666, In re
Enron Corp., et al., Chapter 11 Case No. 01-16034 (AJG), Feb. 25, 2002 (U.S.
Bankruptcy Court, S.D.N.Y.). These orders are attached hereto as Exhibits J-3
and J-4.
30 Docket No. 1666, In re Enron Corp., et al., Chapter 11 Case No. 01-16034
(AJG), Feb. 25, 2002 (U.S. Bankruptcy Court, S.D.N.Y.). This order is attached
as Exhibit J-4.
19
and their creditors. The rate for notes entered into in connection with such
loans bear interest at the rate of one-month LIBOR plus 250 bases points,
measured on the first day of the month.
Although the Debtors are not substantively consolidated under chapter
11, for purposes of administering the estate and resolving the claims against
the Debtors, the Debtors' chapter 11 cases are jointly administered and a global
compromise and settlement has been reached among the Debtors, the ENA Examiner
and the Creditors' Committee to treat the Enron group as a whole for some
purposes./31 Loans under the Amended Cash Management Order, therefore, are
consistent with the interests protected under the Act and should be authorized
by the Commission when entered into consistent with the authorization of the
Bankruptcy Court.
Applicants seek Commission authorization to continue to borrow and
lend funds between associated companies in accordance with the Amended Cash
Management Order as such order may be amended by the Bankruptcy Court. Such
loans are necessary and appropriate in the public interest and the interest of
investors and consumers to further the efficient resolution of the Debtors'
chapter 11 cases. It would not be practical to cease using the financing
flexibility provided by the Amended Cash Management Order and, for example, rely
solely on the Amended DIP Credit Facility. That facility is now only for letters
of credit and to amend it into a borrowing facility would require extensive
negotiations with banks. More importantly, however, to replace the intrasystem
loans with an amended DIP loan facility would be detrimental to the estates. The
estates would incur fees, expenses and encumbrances in borrowing from banks that
they can avoid by borrowing internally. Given the joint administration of the
Debtors in these chapter 11 cases, it is appropriate that the Amended Cash
Management Order provide, as it does, a means for jointly financing these
entities. Furthermore, without such loans Enron's ability to operate its
business and its work of selling, restructuring and disposing of assets would be
significantly impaired. The superpriority Junior
--------------------
31 Substantive consolidation is a judicially created equitable remedy whereby
the assets and liabilities of two or more entities are pooled, and the pooled
assets are aggregated and used to satisfy the claims of creditors of all the
consolidated entities. Typically, substantive consolidation eliminates
intercompany claims and any issues concerning ownership of assets among the
consolidated entities, as well as guaranty claims against any consolidated
entity that guaranteed the obligations of another consolidated entity. Given the
extent and difficulty of the relevant factual and legal issues relating to
substantive consolidation, in an effort to resolve the numerous inter-estate
issues without protracted and expensive litigation, the Debtors, the ENA
Examiner and the Creditors' Committee forged a global compromise and settlement
predicated upon a negotiated formula, as a proxy for resolving all such issues,
distributing value to creditors based on hypothetical cases of substantive
consolidation and no substantive consolidation. Specifically, under the global
compromise of numerous inter-estate issues embodied in the Plan, except with
respect to the Portland Debtors, distributions of Plan Currency will be made on
account of Allowed General Unsecured Claims, Allowed Guaranty Claims, and
Allowed Intercompany Claims based on agreed percentages being applied to two
scenarios for making distributions: (i) substantive consolidation of all of the
Debtors or (ii) substantive consolidation of none of the Debtors. Accordingly,
for example, subject to certain adjustments, a holder of an Allowed General
Unsecured Claim (except a holder of an Allowed General Unsecured Claim against
the Portland Debtors) will receive the sum of (a) 30% of the distribution such
Creditor would receive if the Debtors' estates, other than the estates of the
Portland Debtors, were substantively consolidated, but notwithstanding such
substantive consolidation, one-half of Allowed Guaranty Claims were included in
such calculation and (b) 70% of the distribution such Creditor would receive if
the Debtors were not substantively consolidated. As noted, the 30/70 weighted
average is not a precise mathematical quantification of the likelihood of
substantive consolidation of each Debtor into each of the other Debtors, but,
instead, a negotiated approximation of the likely recoveries if numerous
inter-estate issues, including substantive consolidation, were litigated to
judgment as to all Debtors.
20
Reimbursement Claims and Junior Liens with respect to loans made under the
Amended Cash Management Order assure that the Adequately Protected Debtor's
claim to the funds loaned will be secure and, accordingly, such loans do not
raise the concerns of "milking" associate companies of necessary capital that
Section 12(a) of the Act was intended to prevent. There is every expectation
that these loans will be repaid in full. Portland General is not a lender to
Enron or any other Enron group company under the Amended Cash Management Order
or otherwise and will not make loans under the authorization requested herein.
d. Portland General Cash Management Agreements
Portland General has entered into agreements with its wholly-owned
subsidiaries for cash management. Under the agreements, Portland General
periodically transfers from the bank accounts of each subsidiary any cash held
in the subsidiary's bank account. If the subsidiary has cash needs in excess of
any amount remaining in the account, upon request, Portland General transfers
the required amount into the subsidiary's bank account. Portland General does
not pay interest on the amounts transferred from a subsidiary's account unless
the closing balance of the amount transferred at the end of any month exceeds
$500,000. Any interest paid is at an annual rate of three percent (3%) and is
retained by Portland General until returned to the subsidiary to meet its cash
needs. All administrative expenses are borne by Portland General. Portland
General seeks authorization to continue to perform under such cash management
agreements.
e. Global Trading Contract and Asset Settlement and Sales
Agreements
Certain settlement agreements and asset sales entered into by Enron
and its subsidiaries may involve extensions of credit among associate companies
subject to Section 12(b) of the Act and Rule 45(a). Enron's subsidiaries were
extensively engaged in the retail and/or wholesale trading in various
commodities including, but not limited to, energy, natural gas, paper pulp, oil
and currencies. Subsequent to the bankruptcy filings, these companies now are
engaged in settling these contracts with unaffiliated counterparties under a
settlement process approved by both the Creditors' Committee and the Bankruptcy
Court. The settlement agreements often take the form of global contract or asset
settlements whereby several Enron subsidiaries seek to settle numerous retail or
wholesale trading and related contracts or claims to assets with a group of
related counterparties. Settlements of energy trading contracts entered into by
Portland General are not addressed in this section. To the extent Portland
General is engaged in a dispute over such a contract, it would resolve that
matter independently. In addition, asset or stock sale agreements may be entered
into between Enron and/or its subsidiaries and unaffiliated counterparties. The
settlements and sales may involve extensions of credit among associate
companies, guaranties and indemnifications. Some of the claims resolved in these
settlements are in-the-money to the settling Enron companies (i.e., money is
owed to the settling Enron companies), and others (which will be resolved
through the claims process and result in distributions after the approval of the
Plan) are out-of-the money (i.e., money is owed by the settling Enron companies
to the settling counterparty companies). Under a settlement agreement, or asset
or stock sale agreement, the value associated with a group of contracts or
claims may be netted into a single aggregate payment to be paid to the
appropriate debtor(s) to resolve all claims between the settling Enron companies
and the settling counterparty companies. When the settling Enron companies are
receiving a single aggregated payment, the proceeds are typically held in
segregated accounts as required by Bankruptcy Court orders pending a
determination by
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the Bankruptcy Court on the proper allocation of settlement proceeds among the
Enron group companies that participated in the settlements. If the Enron group
is making a net settlement payment (which will occur in accordance with the
claims procedures and after the approval of the Plan), similarly, the payment
may be made from one company's central account on behalf of all settling Enron
group companies. Although undefined at the time of the settlement, each settling
company presumably has some right to a portion of the settlement proceeds or a
liability for a portion of the settlement payment, so, arguably, collecting or
paying the funds centrally would create a form of an intercompany extension of
credit, but only as a result of allocation findings by the Bankruptcy Court and
not as a result of intended extensions of credit among associated companies.
Applicants seek to continue to execute settlement agreements and asset or stock
sale agreements in this fashion, as it is the most efficient manner of resolving
numerous complex claims and converting them to cash. It would be much less
efficient for the creditors to first litigate the allocation of claims among the
numerous Enron subsidiaries and then to negotiate individually with
counterparties to settle these claims individually. Any settlement or sale
proceeds or costs aggregated as a result of a settlement will be allocated among
the Enron companies as required by the Bankruptcy Court.
f. Portland General Short-Term Financing
Portland General is subject to the jurisdiction of the OPUC with
respect to the issuances and sales of securities with maturities of one year or
longer. Accordingly, the issuance of securities by Portland General to finance
the utility's business with a maturity of one year or longer would be conducted
pursuant to the authorization of the OPUC and in reliance on the exemption
provided by Rule 52(a) under the Act. However, upon Enron's registration under
the Act, Commission authorization would be required for Portland General to
issue debt with a maturity of less than one year. Such securities are not
required to be authorized by the OPUC and the exemption provided by Rule 52(a),
therefore, would not be applicable./32
Portland General requests authorization to issue short-term debt in
accordance with an existing short-term revolving credit facility with certain
banks under the terms and conditions described below. In addition, Portland
General requests authorization, through June 30, 2005, to issue short-term debt
in the form of institutional borrowings, bid notes and commercial paper as
necessary to supplement or replace the short-term revolving credit facility.
Portland General also requests authorization to issue letters of credit to
provide credit support for trading contracts and other uses. All issuances of
short-term debt would not exceed $350 million in aggregate principal amount
outstanding and pricing and other terms at the time of issuance will be
comparable to issuances by companies with comparable credit ratings and credit
profile with respect to debt having similar maturities./33 In addition, Portland
General will not issue any additional short-term debt if Portland General's
common stock equity as a percentage of total capitalization is less than 30