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United States

Latest court ruling a victory for creditors -- Legal fight over purchase of Enron Wind by GE continues

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A federal judge has overturned the bankruptcy court approval of how Enron Wind divvies up the money from its sale last year to General Electric Co for $493 million in assumed cash and debt. The ruling is a victory for the US creditors of Enron Wind, who argue that the bankrupt company is trying to allocate too much of the cash to its European division in an effort to pay fewer of its debts.

The blow to Enron could also be significant for GE, which is trying to knock $160 million off the price it agreed to pay for most of Enron Wind's assets, including the North American patent for variable speed wind technology. Enron Wind is part of the disgraced and bankrupt Houston-based Enron Corp.

US District Judge Jed Rakoff has ordered the US Bankruptcy Court handling the case to review Enron Wind's plan to allocate 63% of the sale price to Europe. In the ruling, Rakoff ordered the lower court to give the matter more than "cursory scrutiny" to ensure that Enron Wind is not "self-dealing." The bankruptcy court is expected to hold a hearing on the matter within weeks. As part of the sale to GE, Enron Wind proposed that $120 million in cash should go to its insolvent US subsidiaries and $205 million to its solvent European units. GE assumed $28 million in debt from the American side of Enron and $140 million, or 83% of the total, from Europe.

scrutiny needed

Rakoff's ruling at the end of March came after an appeal filed by two wind creditors, Mission Iowa Wind and Storm Lake Power Partners I, both owned by Edison International, the energy and financing corporation that owns the utility Southern California Edison (SCE). The judge did not rule on the allocation itself in part, he wrote, because $84 million of the European money is to go "upstream" anyway to Enron Wind in the US and could thus be available to Mission Iowa and Storm Lake. But the Judge noted that Adam Umanoff, a former president of Enron Wind, had testified in a deposition that it was Enron Corp, not Enron Wind, that negotiated the sale to GE.

Enron Corp may have a "special interest" in allocating more of the purchase price to Europe, Rakoff states, because cash could then flow directly back to Enron Corp and be protected from further claims by Enron Wind's creditors. "Meaningful scrutiny of the allocation here in issue is needed, among other reasons, to address the possibility that the allocation may have been infected by self-dealing on the part of Enron Corp," he continues.

Enron Wind says its US unit accounted for 37% of its sales, earnings, and assets. Therefore, say Storm Lake and Mission Iowa, at least $154 million, or 37%, of the sale should go to the US units. They also dispute Enron Wind's 37% figure, saying it is too low. Indeed, Enron's conflict of interest may be even greater than noted by the judge, according to the creditors.

Motive and opportunity

"Enron has a motive and an opportunity here to pull out the money if it goes to Europe," says Steve Warren, a lawyer for Mission Iowa. "We also believe that Enron Corp has claims against Enron Wind," he says. Mission Iowa is owed $70 million by Enron Wind in contracted claims and "substantially more" in unliquidated claims, he says. Enron Corp's Mark Palmer says the bankrupt company may or may not appeal Rakoff's ruling. "Our job will continue to be to maximise the value for all of our shareholders," he says.

Meantime, the Federal Energy Regulatory Commission (FERC) on April 9 agreed to give SCE and five Enron-affiliated wind farms more time to try and settle a dispute over whether Edison overpaid for power from the facilities by as much as $58 million. The parties reached a confidential preliminary settlement some weeks ago, although without the participation of FERC attorneys. A final settlement cannot now be issued until May, at the earliest.

The tentative settlement is a "buy-down" of power: SCE will get $51-58 million deducted from the price of past deliveries of power, exactly the amount, in net present value, that SCE is seeking. The deal is another victory for those who say Enron owes them money.

Questionable status

SCE had asked FERC to strip the wind farms of their special status as "qualifying facilities" under the Public Utility Regulatory Policies Act (PURPA) and order the wind farm operators to repay "overpayments" dating back to at least mid-2001. SCE claims Enron's wind plants did not qualify for PURPA and thus the premium power payments under the act.

SCE filed the request after FERC said it is investigating whether Enron executives lied in 1997 about Enron Wind's ownership in three wind plants -- Zond Wind Systems, Victory Garden Phase IV and Sky River -- so that they could wrongly be classified as Qualifying Facilities. Under PURPA, owners of a qualifying facility must be independent power producers, a status made by questionable by Enron's ownership of Portland General Electric (PGE) in Oregon. At the time, each wind farm promised that ownership would be transferred to special partnerships not affiliated with Enron. The Securities and Exchange Commission and the Justice Department are also investigating the matter. The wind farm operators say that if Enron did lie about its ownership, it was behind their backs.

Since Enron is trying to sell all of its wind assets, ownership of the wind farms should not be an issue for regulators, says Enron's John Ambler. "Qualifying Facility status depends upon ownership, so it's a moot point if they are sold to someone else," he says. He would not comment on who, if anyone, is considering buying Enron's remaining wind assets.

With relation to its status as an independent power producer, Enron is appealing a preliminary ruling by the Securities and Exchange Commission (SEC), which rejected a request by Enron for continued special status under a key anti-monopoly law, the Public Utility Holding Company Act (PUHCA). Under the law, which dates from the depression, utilities can only sell power in a single region.

Enron applied for the certification in 1997, a few months after buying PGE, which had been certified for special exemption from PUHCA since 1986. The SEC's preliminary ruling could endanger Enron's sale of PGE, a key asset, and thus how much money is available to creditors. Before the ruling, PGE had been valued at $1.7-3 billion. If a company loses its exemption from the act, it automatically becomes ineligible for PURPA status.

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