The Federal Energy Regulatory Commission last Thursday called into question the propriety of two emergency loans totalling $1 billion that were secured by two Enron Corp. pipeline subsidiaries at the time — Northern Natural Gas Co. and Transwestern Pipeline — to help bail out the troubled parent company just weeks before it filed for bankruptcy last December.

Specifically, the Commission ordered Transwestern and Northern Natural to “state why they have not violated the Commission’s Uniform System of Accounts for gas companies, and why the costs and indebtedness associated with loans totaling approximately $1 billion made by the pipelines with Citicorp North America Inc. and JP Morgan Chase Bank within weeks of Enron filing for Chapter 11 reorganization…were not imprudently incurred and therefore unrecoverable by the pipelines in any future rate proceedings before the Commission.”

Transwestern still is a subsidiary of Enron, but Northern Natural was purchased last February by Houston-based Dynegy, which earlier this week announced plans to sell the pipeline to Berkshire Hathaway’s MidAmerican Energy Holdings Co. for $928 million in cash and assumption of $950 million in outstanding (See Daily GPI, July 30). Some speculate that FERC’s concerns about the secured loans, which were raised during an audit initiated last January, could complicate the sale between Dynegy and the Warren Buffett-controlled company.

Transwestern and Northern Natural last November, at the request of parent Enron, entered into revolving credit agreements for $550 million and $450 million, respectively, with Citicorp and JP Morgan, according to the order. Both pledged their pipeline assets as collateral under the loan arrangements, the FERC order said. Enron then entered into two subordinated promissory notes with Transwestern for the $550 million, part of which was used to pay off a portion of a $250 million unsecured loan that was outstanding by Enron North America, and the rest was “swept” up by Enron under a “cash management program, it said.

Enron has yet to make any payments on the subordinated notes with Transwestern, which has written them off as unrecoverable.

Enron entered into an assignment and assumption agreement with Northern Natural for $112.5 million, which was used to pay off the remainder of Enron North America’s unsecured loan, the order noted. It also entered into an agreement with MCTJ Holding Co., a limited liability company set up between Enron and Northern Natural, for $307.5 million, which was disbursed to Enron subsidiary, CGNN Holdings Co. Inc, MCTJ’s parent, which in turn funneled the funds to Enron. Moreover, the order noted the $1.5 billion that Northern Natural received from Dynegy in exchange for a stake in the pipeline was loaned to MCTJ, which in turn distributed the funds to Enron.

During the FERC audit, the head of financial accounting and reporting for Transwestern and Northern Natural said Enron directed the pipelines to take out the November 2001 loans to help it stave off the parent company’s bankruptcy, the order noted. “He also indicated that neither company expected to receive any repayment of these loans due to Enron’s bankruptcy. The pipelines are still liable for the entire $550 million and $450 million.”

The Commission said neither Transwestern nor Northern Natural appeared to maintain written cash management agreements with Enron to document these disbursements.

“It appears that the loans made by Transwestern and Northern…were imprudent. It further appears that Transwestern and Northern will experience an increased credit risk as a result of the loans and will have a significantly higher cost of capital ,” the FERC order said.

The Commission has given the two pipelines 30 days to respond to its finding that the loans were “imprudently incurred,” and to justify why the costs arising from the loans and arrangements with Enron should be passed onto ratepayers after their existing rates expire. In addition, they must respond to FERC’s charge that they violated its accounting guidelines by failing to keep written cash management agreements with Enron.

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